BRUSSELS 1 February 2021 – ESBG issued today a letter commenting on EFRAG's Draft Endorsement Advice on IFRS 17 Insurance Contracts.
ESBG represents the locally focused European banking sector, helping savings and retail banks in 21 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. ESBG unites at EU level around 900 banks that provide retail banking services, including for certain banks the provision of insurance coverage and related services to their clients. This letter represents the consensus view of ESBG, including the financial conglomerates that are represented.
ESBG supports a high-quality standard for insurance contracts accounting; however, continues to believe that IFRS 17 as amended in June 2020 does not correctly reflect certain contracts issued by ESBG members that represent long-term life-saving products managed under cash flow matching and, to a certain extent, participating contracts, through its measurement nor its presentation requirements.
ESBG previously shared the main accounting deficiencies that IFRS 17 has in its view and acknowledges that the requirement of annual cohorts is the most transversal issue, that creates inconsistencies for almost all entities that issue insurance contracts with how these contracts are managed. However, at this current stage ESBG cannot neglect that the accounting deficiencies not addressed by the IASB in the final standard altogether will lead to negative consequences in the prudential field for financial conglomerates.
More particularly, what worries ESBG financial conglomerates most is the consequences that endorsing IFRS 17 will have on their solvency ratios for the banking groups. This is a significant issue that certain ESBG members – i.e. the financial conglomerates affected by this issue – already highlighted to EFRAG and the European Commission within its letter of 23 July 2020. A copy of this document is provided in Appendix 1 to this letter
ESBG supports the endorsement of IFRS 17 provided that there is (i) an appropriate prudential solution that addresses the volatility arising in OCI for financial conglomerates and (ii) an accounting solution for the annual cohorts issue. Both issues must be resolved as part of the endorsement process, addressing the first issue as a change in the Capital Requirements Regulation (CRR), and both should not impact the 1 January 2023 effective date of IFRS 17.
Regarding the volatility in OCI, given it is an issue arising from the application of IFRS 17 that affects prudential requirements for financial conglomerates, ESBG requests that EFRAG recommend the European Commission to consider specific changes in the CRR made in conjunction with the IFRS 17 endorsement process.
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