The measurement under IFRS 17 requires the determination of a current value of the insurance contract, considering market perspectives for financial risks and the reporting entity’s perspective for all other risks, in IFRS 17 referred to as the Fulfilment Cash Flows. This current value is the basis of the measurement of the insurance contract and is to be disclosed. The disclosures include its conceptual parts, the unbiased estimate of the expected present value of future cash flows, which is adjusted for the time value of money and further adjustments applied for financial risks and non-financial risks.
At outset, a Contractual Service Margin (CSM) is established to offset any gain, if any, at initial measurement – that is the value of premiums in excess of the value of obligations. This is then recognized as revenue over the period providing coverage. While there is no unit of account defined for the Fulfilment Cash Flows, the unit of account for the CSM are partitions of annual cohorts, based on at least three different profitability categories, which are part of annual new business and form the unit of account of the CSM.
The described main approach of IFRS 17 is referred to as General Measurement Approach (GMA). IFRS17 allows for a simplified alternative approach to be used for contracts of short coverage period (typically not more than 12 months), known as the Premium Allocation Approach (PAA). The PAA is similar to the unearned premium method in that the measurement of the liability for remaining coverage of short duration contracts might be simplified by distributing premiums over the coverage period in line with the passage of time or in proportion to expected benefits. The PAA only applies to the part of the total measurement of the contract referred to as liability for remaining coverage, with the liability of incurred claims following the GMA.
Some special guidance applies for certain contracts whose benefits are determined based on indices or other underlying items like surplus (i.e., insurance contracts with direct participation features) sometimes referred to as the Variable Fee Approach (VFA). It includes a feature distributing the insurer’s share in changes of financial risk and incurred events over the remaining coverage period of the contract.
Reinsurance ceded is measured using assumptions that are consistent with the ceded contract.