IFRS 17 at a glance
IFRS 17 introduces the new measurement model for insurance contracts and will be effective in 2023.
Similar to IFRS 4 Insurance Contracts with some new requirements, including as to the border with financial instruments accounting.
IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the IASB’s comprehensive project on insurance contracts, the standard provides a temporary exemption from the requirements of some other IFRSs, including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.
IFRS 4 applies to annual periods beginning on or after 1 January 2005. IFRS 4 will be replaced by IFRS 17 as of 1 January 2023.
The general measurement model
On initial recognition, the liability of a group of insurance contracts is made up of the following components.
- The fulfilment cash flows, which represent the risk-adjusted present value of the entity’s rights and obligations to the policyholders, comprising:
- estimates of expected cash flows;
- discounting; and
- a risk adjustment for non-financial risk.
- The contractual service margin (CSM), which represents the unearned profit that the entity will recognise as it provides services over the coverage period.
- The CSM includes the effects of cash flows occurring on the date of recognition and the effects of derecognising any assets or liabilities previously recognised before the group of contracts was recognised – e.g. asset for insurance acquisition cash flows paid.
- When the above results in a net outflow on initial recognition, the total net outflow is recognised as an immediate loss.
Subsequent to initial recognition, the liability of a group of insurance contracts comprises the liability for remaining coverage (fulfilment cash flows for future services – e.g. insured events that have not occurred – and the CSM) and the liability for incurred claims (fulfilment cash flows for claims and expenses already incurred but not yet paid).
The fulfilment cash flows are remeasured at each reporting date to reflect current estimates. Generally, the changes in the fulfilment cash flows are treated in a number of ways:
- changes in the effect of the time value of money and financial risk are reflected in the statement of financial performance;
- changes related to past and current service are recognised in profit or loss; and
- changes related to future service adjust the CSM.
A simplified approach and modifications to the general measurement model
The general measurement model is modified when it is applied to:
- reinsurance contracts held;
- direct participating contracts; and
- investment contracts with discretionary participation features (DPFs).
IFRS 17 Presentation requirements
Insurance revenue is derived from the changes in the liability for remaining coverage for each reporting period that relate to services for which the entity expects to receive consideration.
Investment components and refunds of premiums are excluded from insurance revenue and insurance service expenses.
The insurance service result is presented separately from insurance finance income or expense.
Entities can choose to disaggregate insurance finance income or expense between profit or loss and other comprehensive income (OCI).
See also: Presentation insurance contracts
IFRS 17 Transition
Full retrospective application is required to restate prior-year comparatives and to determine the CSM at transition – however, if it is impracticable, then a modified retrospective approach and a fair value approach are available.
There is a limited ability to redesignate some financial assets on initial application of IFRS 17.
What is the key impact of IFRS 17 on insurance reporting?
New perspectives for analysts and users. IFRS 17 will change the way analysts interpret and compare companies. Greater global comparability and increased transparency will give users more insight into an insurer’s financial health.
Volatility in financial results and equity. The effect of using current market discount rates will vary, but it is likely to be significant, resulting in greater volatility in financial results and equity. Accounting mismatches may be reduced and economic mismatches between assets and liabilities will become more visible. Insurers may wish to revisit the design of their products and their investment allocation.
Key financial metrics will change. Premium volumes will no longer drive the ‘top line’ in the performance statement because investment components and cash received can no longer be considered to be revenue. The new measurement model may result in profits being released over significantly different patterns for some contracts.
Clearer picture of performance. The impact that financial risks and investment income have on an insurer’s results will be presented separately from insurance performance, providing a clearer picture of profit drivers.
Life insurance sector impacts. The use of current discount rates and the end of ‘lockedin’ assumptions will almost certainly lead to significant accounting changes for many life insurers. The burden and time value of minimum interest guarantees will become more transparent.
Non-life insurance sector impacts. Non-life insurers will need to navigate the criteria to qualify for the PAA in order to retain a familiar accounting model. However, the discounting of the liability for incurred claims may be a significant change from current practice.
New routines. Identifying and accounting for onerous contracts and presenting an explicit margin for non-financial risk will gain a new prominence for both life and non-life insurers. Accounting for reinsurance ceded is separate from direct insurance contracts and will have significant challenges.
Communication challenges. New presentation and disclosure requirements will change the way performance is communicated. Entities will need to redesign KPIs and educate internal and external users.
New data, systems, process and control demands. The need for new data, and updated systems and processes will be challenging given the long time-horizon over which many insurers operate and the legacy systems that many still use. Entities will also have to develop controls around any system and process changes and develop or upgrade existing controls for business as usual after transition.
Watch out for second-order impacts. IFRS 17 is triggering a second wave of activity by certain local tax authorities and prudential regulators. Implementation plans need to be flexible to accommodate these second-order effects.
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