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IFRS 17 – Insurance Contracts Summary

Core Content

IFRS 17 is a new international accounting standard issued by the International Accounting Standards Board (IASB) that replaces IFRS 4. It introduces a comprehensive and principle-based framework for the recognition, measurement, presentation, and disclosure of insurance contracts, including reinsurance and investment contracts with a discretionary participation feature (DPF).

Main Features of IFRS 17

• General Model: This is the primary measurement model for insurance contracts. It uses current assumptions to estimate future cash flows, including the time value of money, financial risks, and non-financial risks. It explicitly measures the cost of uncertainty.
• Premium Allocation Approach (PAA): A simplified version of the General Model applicable to certain insurance contracts, particularly those with a coverage period of one year or less. It does not apply to the measurement of incurred claims.
• Components of Insurance Contracts: Insurance contracts may contain distinct components (e.g., investment components or separate obligations) that are accounted for under other standards like IFRS 9 or IFRS 15.
• Separation of Components: Entities must separate non-insurance components such as investment components or service obligations, and account for them under appropriate standards.

Key Changes for Non-Life Insurance

• Discounting: Introduction of discounting for incurred claims.
• Explicit Risk Adjustment: Non-financial risk is now explicitly adjusted in the measurement of liabilities.
• Transparency: More transparent reporting of changes in the elements of insurance liabilities.
• PAA Eligibility: Many non-life insurance contracts (e.g., annual motor insurance) are expected to be eligible for the PAA.

Key Changes for Life Insurance

• Single Accounting Model: All insurance contracts are accounted for under a single model, eliminating product-specific methods.
• Updated Assumptions: Assumptions are not locked in and are updated over time.
• Current Value Measurement: Guarantees and options previously not fully recognised are now measured at current values.
• New Revenue and Service Result Presentation: Revenue and service results are presented separately.
• Deferred Acquisition Costs: These are now part of the insurance contract's measurement, replacing the need for separate release mechanisms.

Scope

• IFRS 17 applies to issued insurance contracts, reinsurance contracts held, and investment contracts with a DPF, provided the entity also issues insurance contracts.
• Contracts that are primarily service-based for a fixed fee may be excluded unless IFRS 15 is applied with specific conditions met.

Level of Aggregation

• Entities must identify portfolios of insurance contracts based on similar risks and management.
• Portfolios are divided into groups: onerous, non-onerous, and remaining contracts.
• Groups cannot include contracts issued more than one year apart.
• The grouping is established at the inception of the contract and not reassessed.

Recognition and Measurement

• Recognition: Insurance contracts are recognised from the earliest of: the beginning of the coverage period, the date when the first payment is due, or when the contract becomes onerous.
• Measurement: On initial recognition, the liability is measured as the sum of the Fulfilment Cash Flows (FCF) and Contractual Service Margin (CSM).
• CSM: Represents unearned profit and is adjusted over time based on changes in FCF and risk factors.
• Onerous Contracts: If a contract is onerous at initial recognition, the carrying amount is equal to FCF and CSM is zero. Subsequent onerousness is recognised in profit or loss.

Variable Fee Approach (VFA)

• Applies to direct participation insurance contracts.
• CSM is adjusted for changes in the entity’s share of underlying fair value and FCF.
• Revenue is derived from the allocation of CSM over the coverage period.
• Changes in incurred claims or expenses do not affect CSM.

Effective Date and Transition

• Effective Date: IFRS 17 is effective for annual periods beginning on or after 1 January 2021.
• Transition: Entities apply the Standard retrospectively unless impracticable, in which case the modified retrospective approach or fair value approach is used.
• Modified Retrospective Approach: Uses reasonable and supportable information, including hindsight if necessary.
• Fair Value Approach: Calculates CSM as the difference between fair value and FCF at the transition date, without the need to aggregate into annual groups.

Disclosure Requirements

• Entities must disclose qualitative and quantitative information related to:
  • Amounts recognised in financial statements from insurance contracts.
  • Significant judgements and changes in those judgements.
  • Nature and extent of risks from insurance contracts.
• Extensive disclosures are also required regarding the transition process.

Observations

• IFRS 17 introduces significant changes to the accounting and reporting of insurance contracts.
• The implementation will require substantial changes to processes, systems, and coordination across finance, actuarial, and IT functions.
• The level of aggregation and CSM measurement are considered challenging aspects of the Standard.
• The PAA is likely to be widely adopted by non-life insurers with short coverage periods.
• Transition requirements, especially for entities with long-standing liabilities, are complex and require careful planning.

Key Contacts

For more information, visit www.iasplus.com or www.deloitte.com.