The IFRS 17 Insurance contracts model combines a current balance sheet measurement of insurance contracts with recognition of profit over the period that services are provided. The general model in the standard requires insurance contract liabilities to be measured using probability-weighted current estimates of future cash flows, an adjustment for risk, and a contractual service margin representing the profit expected from fulfilling the contracts.
Effects of changes in the estimates of future cash flows and the risk adjustment relating to future services are recognised over the period services are provided rather than immediately in profit or loss. The standard includes specific adaptations for the measurement and presentation of insurance contracts with participation features; and for reinsurance contracts held.
The standard contains a simplified model, which can be used for contracts with coverage periods of one year or less, or when doing so approximates the general model. Entities have an option to present the effect of changes in discount rates in profit or loss or in other comprehensive income.
The key principles in IFRS 17 Insurance contracts are that an entity:
- Identifies insurance contracts as those under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder
- Separates insurance contracts into components, being specified embedded derivatives, distinct investment components and distinct (i.e., non-insurance ) goods or services from insurance contracts
- Divides the contracts into groups it will recognise and measure
- Recognises and measures groups of insurance contracts at:
- A risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all available information about the fulfilment cash flows in a way that is consistent with observable market informationPlus
- An amount representing the unearned profit in the group of contracts (the contractual service margin or CSM)
- Recognises profit from a group of insurance contracts over the period the entity provides insurance coverage, and as the entity is released from risk. If a group of contracts is expected to be onerous (i.e., loss-making) over the remaining coverage period, an entity recognises the loss immediately
- Presents insurance revenue, insurance service expenses and insurance finance income or expenses separately
- Discloses information to enable financial statement users to assess the effect that contracts within the scope of IFRS 17 have on an entity’s financial position, financial performance and cash flows. Thus, an entity discloses qualitative and quantitative information about:
- Amounts recognised in its financial statements from insurance contracts
- Significant judgements, and changes in those judgments, when applying the standard
- The nature and extent of the risks from contracts within the scope of this standard
The standard contains a core measurement approach that is referred to as the ‘general model’. The standard includes an adaptation of the general model, the ’variable fee approach’ that should be applied to certain types of contracts with direct participation features. If certain criteria are met, an entity may apply a simplified measurement approach (premium allocation approach (PAA). This approach allows an entity to measure the amount of remaining coverage by allocating the premium over the coverage period.
For reinsurance contracts held, an entity should apply either a modified version of the general model or the premium allocation approach. The general model is modified because the CSM for reinsurance contracts held can be either a net cost or net gain of purchasing reinsurance for services yet to be received.
In contrast, the CSM for insurance contracts issued can only be the unearned profit for services yet to be provided. For investment contracts with discretionary participation features, an entity applies a modified general model because of the absence of significant insurance risk in the contracts.
An entity shall apply IFRS 17 Insurance Contracts to: [IFRS 17:3]
- Insurance contracts, including reinsurance contracts, it issues;
- Reinsurance contracts it holds; and
- Investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.
Some contracts meet the definition of an insurance contract but have as their primary purpose the provision of services for a fixed fee. Such issued contracts are in the scope of the standard, unless an entity chooses to apply to them IFRS 15 Revenue from Contracts with Customers and provided the following conditions are met: [IFRS 17:8]
- the entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the contract with that customer;
- the contract compensates the customer by providing a service, rather than by making cash payments to the customer; and
- the insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from uncertainty over the cost of those services.
An entity shall apply IFRS 17 for annual reporting periods beginning on or after 1 January 2021. If an entity applies IFRS 17 earlier, it shall disclose that fact. Early application is permitted for entities that apply IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers on or before the date of initial application of IFRS 17.
See also: The IFRS Foundation