ESMA accepts that both the overlay approach and the temporary exemption from applying IFRS 9 are needed to address different concerns raised by the insurance industry about the misalignment of the effective date of IFRS 9 and the new insurance contracts Standard.
While the existence of two complementary approaches further reduces comparability among entities, each of them might be better suited for a different subset of entities issuing insurance contracts in the scope of IFRS 4 depending on their business activities and group structures.
ESMA is of the view that these approaches should be temporary and their scope be limited to their objective, namely to address the misalignment between the effective dates between IFRS 9 and the new insurance contracts Standard.
Regarding the scope of the temporary exemption, ESMA agrees with the assessment of the predominance criterion at the reporting entity level. However, ESMA suggests that this criterion is widened to capture all types of liabilities an insurer is expected to carry for its insurance activities linked to issuance of insurance contracts within the scope of IFRS 4.