A federal budget proposal to prohibit insurers from using a contractual service margin as a tax-deductible reserve could impose a unique tax liability on the industry.
International Financial Reporting Standard 17 (IFRS 17) “will significantly change the financial reporting of Canadian insurers” effective Jan. 1, 2023, the Department of Finance said in Budget Document 2022-23 filed April 7.
But it probably won’t affect as many P&C carriers, experts said Canadian underwriter.
A key accounting concept in IFRS 17 is the contractual service margin (CSM).
It aims to try to predict the exact profit the insurer will make over the life of a contract, says Daniel Singer, chairman of the 2022 conference and former president of the Canadian Association of Insurance Accountants.
“Budget 2022 proposes legislative changes to confirm support for the use of IFRS 17 accounting standards for income tax purposes, with the exception of a new reserve known as the contractual service margin , subject to certain modifications. Without this exception, profits incorporated into the new reserve would be deferred for income tax purposes,” the Department of Finance said in the budget document released on April 7.
Short-term policies such as auto insurance “generally won’t be affected that much,” said Paul Vienneau, partner, corporate tax (financial institutions) for KPMG Canada.
That could apply to title or credit insurance, Singer added. “A strong majority of current P&C contracts will not apply.”
Life insurance contracts tend to be multi-year, but many P&C policies are renewed annually.
Singer noted that most P&C insurers use the premium allocation approach (PAA). And the proposed measure would impact P&C insurers that use the General Measurement Model (GMM), not the PAA.
Some P&C insurers have certain lines of business with a longer tail, Singer said. If an insurer has a contract with a “limit” of more than one year, the insurer must compare the results between the profit it would obtain using GMM and the profit it would obtain using PAA, he said. he adds.
If the carrier has a contract for more than a year – and if the difference between the insurance reserves calculated using the GMM is materially different from what it would get on the PAA – then the insurer may need to use the GMM. If the carrier uses GMM, the contractual service margin is part of the calculation, Singer said.
In 2021, the Federal Government noted that the MSC of IFRS 17 would allow insurers to defer the recognition of profits until the years following the tax year in which the economic (income-generating) activities took place . The intention of the 2022 budget proposal is therefore to recognize profits in the year in which the economic activity took place.
The result is that insurers should pay income taxes sooner than they otherwise would have, suggested Stephen Frank, president and CEO of the Canadian Life and Health Insurance Association.
“In any business other than insurance, you make a profit when you have provided the services. You don’t take the profit as soon as you sign the contract,” Frank said. “If someone buys a cell phone with a three-year plan, the cell phone company has to wait until that contract is over to record that profit. They don’t pre-book it to pay [corporate income] tax on it. »
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