Fulfilment cash flows

Fulfilment cash flows comprise:Fulfilment cash flows

Fulfilment cash flows represent cash flows within the boundary of an insurance contract, Those cash flows are related directly to the fulfilment of the contract, including those for which the entity has discretion over the amount or timing. IFRS 17 provides the following examples of such cash flows [IFRS 17 B65]:

  • Premiums and related cash flows Fulfilment cash flows
  • Claims and benefits, including reported claims not yet paid, incurred claims not yet reported and expected future claims within the contract boundary
  • Payments to policyholders (or on behalf of policyholders) that vary depending on underlying items Fulfilment cash flows
  • Payments to policyholders resulting from embedded derivatives, for example, options and guarantees
  • An allocation of insurance acquisition cash flows attributable to the portfolio to which the contract belongs Fulfilment cash flows
  • Claims handling costs Fulfilment cash flows
  • Contractual benefit costs paid in kind Fulfilment cash flows
  • Policy administration and maintenance costs, including recurring commissions that are expected to be paid to intermediaries
  • Transaction-based taxes and levies (such as premium taxes) Fulfilment cash flows
  • Payments by the insurer in a fiduciary capacity to meet tax obligations incurred by the policyholder, and related receipts
  • Claim recoveries, such as salvage and subrogation (to the extent they are not recognised as separate assets)
  • An allocation of fixed and variable overheads directly attributable to fulfilling insurance contracts. (Such overheads are allocated to groups of contracts using methods that are systematic and rational, and are consistently applied to all costs that have similar characteristics)

Any other costs that may be charged specifically to the policyholder under the terms of the contract Fulfilment cash flows

  • Insurance acquisition cash flows are those arising from the cost of selling, underwriting and starting a group of insurance contracts that are directly attributable to the portfolio of insurance contracts to which the group belongs. Such cash flows include cash flows that are not directly attributable to individual contracts or groups of insurance contracts within the portfolio ([IFRS 17 Appendix A] – See IFRS Jargon). Fulfilment cash flows
  • There is no restriction of insurance acquisition cash flows to only those resulting from successful efforts. Therefore, the directly attributable costs of an underwriter of a portfolio of motor insurance contracts, for example, need not be apportioned between costs for contracts issued and the cost of efforts that did not result in the issuance of a contract.
  • IFRS 17 provides a list of cash flows that should not be included in cash flows that arise as an entity fulfils an existing insurance contract, these include, for example [IFRS 17 B66]:
    • Investment returns (accounted for separately under applicable IFRSs)  FulfilFulfilment cash flowsment cash flows
    • Cash flows (payments or receipts) that arise under reinsurance contracts held (accounted for separately) Fulfilment cash flows
    • Cash flows that may arise from future insurance contracts, i.e., cash flows outside the boundary of existing contracts Fulfilment cash flows
    • Cash flows relating to costs that cannot be directly attributed to the portfolio of insurance contracts that contain the contract, such as some product development and training costs; these are recognised in profit or loss when incurred Fulfilment cash flows
    • Cash flows that arise from abnormal amounts of wasted labour or other resources that are used to fulfil the contract; such costs are recognised in profit or loss when incurred
    • Income tax payments and receipts the insurer does not pay or receive in a fiduciary capacity
    • Cash flows between different components of the reporting entity, such as policyholder and shareholder funds, if these cash flows do not change the amounts paid to policyholders
    • Cash flows arising from components separated from the insurance contract and accounted for using other applicable IFRSs


  • As a change to many existing accounting practices under IFRS 4, no explicit deferred acquisition cost assets exist. Instead, the insurance acquisition cash flows are included as a “negative liability” within the measurement of the CSM on initial recognition. Because the CSM can never be negative, there is no longer a need to perform any recoverability assessments for acquisition costs deferred.
  • Investment returns are not part of the fulfilment cash flows of a contract because measurement of the contract should not depend on the assets that the entity holds. However, where a contract includes participation features, the measurement of the fulfilment cash flows should include the effect of returns from underlying items in those cash flows. The “Illustrative Examples” that accompany IFRS 17 explain that asset management is part of the activities the entity must undertake to fulfil the contract when there is an account balance calculated using returns from specified assets and fees charged by the entity (see example). In our view, an entity should incorporate asset management expenses in a way that is consistent with how it considers the returns from the assets it is holding in the estimates of fulfilment cash flows, based on the product features. So if investment returns from underlying items are included in fulfilment cash flows then the asset management expenses that relate to those returns should also be included.

Two other important factors to consider in determining estimates of fulfilment cash flows are that the estimates of future cash flows must be current (based on actual data on the measurement date), and explicit (No historical model but based on current insights of the future). Fulfilment cash flows

Using current estimates

Estimated cash flows should be current, i.e., reflect conditions existing at the measurement date, including assumptions about the future. An entity should review and update its estimates from the close of the previous reporting period. In doing so, an entity should consider whether updated estimates faithfully represent the conditions at the end of the reporting period and changes during the period [IFRS 17 B54]. Fulfilment cash flows

Faithful representation of conditions at the reporting date and changes in the period

If conditions have not changed in a period, shifting a point estimate from one end of a reasonable range at the beginning of the period to the other end of the range at the end of the period would not faithfully represent what has happened during the period.

If the most recent estimates are different from previous estimates, but conditions have not changed, an entity should assess whether the new probabilities assigned to each scenario are justified. In updating its estimates of those probabilities, the entity should consider both the evidence that supported its previous estimates and all newly available evidence, giving more weight to the more persuasive evidence.

An entity should not update probabilities for claim events to reflect actual claims that took place after the reporting date but before the financial statements are finalised. For example, there may be a 20% probability at the end of the reporting period that a major storm will strike during the remaining six months of an insurance contract. After the end of the reporting period, but before the financial statements are authorised for issue, a major storm strikes.

The fulfilment cash flows under that contract should not reflect hindsight (i.e., the storm that occurred in the next period). Instead, the cash flows included in the measurement should include the 20% probability apparent at the end of the reporting period (with disclosure applying IAS 10 Events After the Reporting Date that a non-adjusting event occurred after the end of the reporting period) [IFRS 17 B55 and IAS 10 10-11].

Explicit cash flows

An entity estimates future cash flows separately from other estimates, e.g., the risk adjustment for non-financial risk or the adjustment to reflect the time value of money and financial risks. There is an exception if the entity uses the fair value of a replicating portfolio of assets to measure some of the cash flows that arise from insurance contracts. This will combine the cash flows and the adjustment to reflect the time value of money and financial risks. The fair value of a replicating portfolio of assets reflects both the expected present value of cash flows from the portfolio of assets and the associated risk.

Note: Change in practice

Some existing accounting practices incorporate implicit margins for risk in a best estimate liability. For example, determining the liability for incurred claims based on an undiscounted management best estimate, which often incorporates conservatism or implicit prudence. IFRS 17 appears to require a change to this practice such that incurred claims liabilities must be measured at the discounted probability-weighted expected present value of the cash flows, plus an explicit risk adjustment. Entities will need to be more transparent in providing information about how liabilities related to insurance contracts are made up.

Fulfilment cash flows

Fulfilment cash flows

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Something else -   Reinsurance contracts held

Something else -   Reinsurance contracts held

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