Most insurers in the region used the temporary exemption and applied IFRS 9 for the first time alongside IFRS 17 on 1 January 2023. The classification and impairment decisions taken now will shape results for years.
Key takeaways
- The business model assessment for investment portfolios determines whether fair value movements hit profit or loss, OCI or neither.
- Premium receivables from policyholders and receivables from reinsurers and brokers need distinct ECL approaches.
- Sukuk and bond portfolios at amortised cost or FVOCI require a staging model, not a provision matrix.
Insurers that qualified for the temporary exemption in IFRS 4 have applied IFRS 9 for the first time from 1 January 2023, the same date IFRS 17 replaced IFRS 4. Having supported several GCC insurers and takaful operators through the transition, three questions stand out as the ones that required the most judgement and the most documentation.
1. What is the business model for the investment portfolio?
Under IFRS 9 a debt instrument is measured at amortised cost only if it is held within a business model whose objective is to collect contractual cash flows and its terms give rise to payments that are solely principal and interest. Fair value through other comprehensive income applies where the objective is both collecting and selling. Anything else, including equities unless the OCI election is made, goes to fair value through profit or loss.
Insurers hold portfolios to back liabilities, and the interaction with IFRS 17 matters: where insurance finance income or expense is disaggregated between profit or loss and OCI, matching the accounting for the assets avoids volatility that does not reflect economics. The business model assessment is made at portfolio level, on the basis of how the portfolio is actually managed, and must be evidenced by investment policy, mandate documents and historical sales activity. A portfolio described as held-to-collect but traded actively will not survive audit.
2. Do sukuk and bonds pass the SPPI test?
Many Gulf insurers hold sukuk. Most structures pass the solely-payments-of-principal-and-interest test because the contractual cash flows are economically equivalent to a plain debt instrument, but each structure must be analysed, particularly where profit rates reset, where there are early dissolution features, or where returns are linked to underlying asset performance. The analysis is a document the auditor will ask for.
3. How is impairment measured across the different receivables?
An insurer's credit exposures fall into three groups that need different treatment. Investment-grade sukuk and bonds at amortised cost or FVOCI require the general three-stage model with PD, LGD and EAD, typically using rating-agency default studies given the absence of internal default history. Premium receivables from policyholders are within the scope of IFRS 17 rather than IFRS 9 where they form part of the insurance contract cash flows, which removes them from ECL altogether; the analysis of what is inside and outside the contract boundary must be explicit. Receivables from reinsurers, brokers and agents are IFRS 9 financial assets and are typically assessed with a simplified-approach provision matrix or, for reinsurance balances, with reference to the reinsurer's rating.
Getting these boundaries right in the first year is essential because the transition adjustments were recognised in opening equity and the classifications, once made, are not freely revisited.