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72 | The South African Insurance Industry Survey 2016
The following points are examples of relevant and debt instruments at a point in time. If a certain hurdle If the debt instruments at amortised cost or FVOCI could
objective evidence: is reached, namely, growth in the market value of the not be designated as at FVOCI, impairment allowances
debt instruments in excess of CPI, a performance fee based on expected credit losses should be calculated
–– How the performance of the business model (and the is payable. Regular sales will take place as the asset and recognised. Expected credit losses are measured as
financial assets held within that business model) is managers oversee the debt instruments and rebalance the present value of all cash shortfalls over the expected
evaluated and reported to the entity’s key management the portfolios. Based on the information provided, the life of the debt instrument. An insurer should decide
personnel. objective of the business model of the debt instruments is how to apply the expected credit loss model to its debt
management on a fair value basis. Consequently the debt instruments and develop impairment methodologies and
–– The risks that affect the performance of the business instruments will be classified as at FVPL. controls.
model (and the financial assets held within that business
model) and the way those risks are managed. Debt instruments should be measured at amortised cost Impact on insurers
if the business model is to hold the assets to collect If insurers cannot delay the adoption of IFRS 9, they
–– How managers of the business are compensated, e.g. contractual cash flows. If the business model is to hold should assess the impact of IFRS 9 as soon as possible.
whether the compensation is based on the fair value the assets to collect contractual cash flows and to sell Apart from the accounting impact, systems and processes
of the assets managed or the contractual cash flows them, the debt instruments should be measured at FVOCI. may need to be modified to apply IFRS 9 and to satisfy
collected. If the debt instruments are measured at amortised cost or the new disclosure requirements required in the financial
FVOCI, an insurer still has the option at initial recognition statements. The changes to systems and processes may
–– The frequency, volume and timing of sales in prior to irrevocably designate them as at FVTPL if doing so necessitate changes to key internal controls over financial
periods, the reasons for such sales, and its expectations eliminates or significantly reduces a measurement or and regulatory reporting or impact the way in which work
about future sales activity. recognition mismatch. It could perhaps be argued that if is performed by relevant personnel.
the changes in insurance liabilities are recognised in profit
The above criteria could be applied to an example where or loss (based on the new insurance contracts standard), When is the perfect time to start with an IFRS 9
an insurer’s portfolios of debt instruments are managed by there is a measurement mismatch between the insurance conversion project?
asset managers. The asset managers would report the fair liabilities and debt instruments.
value regularly to the insurer and would manage the debt In the words of Rasheed Ogunlaruc “Who can say, but
instruments, based on their mandate, to address the risks Consequently the debt instruments will be designated as probably somewhere between haste and delay - and it's
that affect performance, for example: liquidity and growth. at FVPL. usually most wise to start today.”
The asset managers are generally paid a fixed
management fee based on the market value of the
