Simple

IFRS 17 | INSURANCE CONTRACTS

Explanation

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IFRS 17 | INSURANCE CONTRACTS

IFRS 17: Objective, few basic concepts

Objective:
Give users information to assess the effect that insurance contracts have on the entity's
financial position, financial performance and cash flows
Separating Components:
• Embedded derivatives
• Investment component
• Distinct goods or services other than insurance contract services
Aggregation
A portfolio comprises contracts subject to similar risks and managed together.
Entity should not net i) onerous and ii) contracts expected to be profitable
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IFRS 17 | INSURANCE CONTRACTS

1. Recognition
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Recognition: WHEN
Earliest of
a) Beginning of coverage period;
b) Date when first payment is due; and
c) When a group of contracts become onerous

Onerous Contracts:
If cash flows arising from the contract at the date of initial recognition in total are a net
outflow i.e., expected to make a loss
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IFRS 17 | INSURANCE CONTRACTS

2. Initial Measurement
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Initial Measurement = Fulfilment Cash Flows (FCF) + Contractual Service Margin (CSM)
Fulfilment Cash Flows (FCF)
Estimated Cash Flows
1. estimates of future cash flows
(Inflows less Outflows)
E.g. E.g.
2. adjustment to reflect the time Premium Claims

value of money
3. financial risks related to the
future cash flows (to the extent
not in 1 above)
4. a risk adjustment for non-
financial risk 1 2 3 4
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IFRS 17 | INSURANCE CONTRACTS

2. Initial Measurement
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Initial Measurement = Fulfilment Cash Flows (FCF) + Contractual Service Margin (CSM)
Contractual Service Margin (CSM)
Represents the unearned profit the entity will recognise as it provides insurance contract
services in the future.
Only when the group of contracts
Principle 1: expected profits - don’t
are not onerous.
recognise in PnL or OCI
= initial recognition of an amount for
the FCF x -1 Principle 2: expected loss – recognise in
Initial Measurement
PnL immediately
= ZERO!
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IFRS 17 | INSURANCE CONTRACTS

3. Subsequent Measurement
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Subsequent Measurement = Liability for remaining coverage period

+ Liability for claims incurred

Liability for remaining coverage period = Fulfilment Cash Flows (FCF) related to future
services + Contractual Service Margin (CSM)

Liability for claims incurred = Fulfilment cash flows related to past service

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IFRS 17 | INSURANCE CONTRACTS

3. Subsequent Measurement
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Liability for remaining coverage period: = FCF + CSM

Fulfilment Cash Flows (FCF) related to future services → same as initial measurement
Contractual Service Margin (CSM) =
Without Direct Participation Feature With Direct Participation Feature (e.g., Unit linked)

1. effect of any new contracts added 1. effect of any new contracts added

2. interest accreted on the carrying amount of the CSM 2. change in the amt of the F.V. of the underlying items
F.V. – Fair Value

3. changes in FCF relating to future service (not onerous) 3. changes in FCF relating to future service (not onerous)

4. any currency exchange (FX) differences 4. any currency exchange (FX) differences

5. insurance revenue for the period 5. insurance revenue for the period
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IFRS 17 | INSURANCE CONTRACTS

3. Subsequent Measurement
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Liability for remaining coverage period:

Changes in carrying amount because of below goes to PnL
• Insurance revenue
• Insurance service expenses
• effect of the time value of money and the effect of financial risk

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IFRS 17 | INSURANCE CONTRACTS

Premium allocation approach

2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Simplified approach for initial measurement and subsequent recognition

Conditions/eligibility:
1. liability for remaining coverage would not differ materially from default approach
[or]
2. coverage period of each contract in the group <= 1 year
Initial Measurement:
Liability for remaining coverage =
1. premiums received, if any
2. minus any insurance acquisition cash flows
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IFRS 17 | INSURANCE CONTRACTS

Premium allocation approach

2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

Subsequent Measurement:
Liability for remaining coverage
= Carrying amount
+ premiums received in the period
+/- adjustments to financing component (TVM, financing component)
- insurance revenue for the period
- amount paid for incurred claims

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IFRS 17 | INSURANCE CONTRACTS

Modifications
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

WHEN
If the conditions in IFRS 17 are satisfied. After modification
• Significant changes to nature (explained in the standard)
• insurance contract switches from ‘with direct participation’ to ‘without direct
participation’ or vice versa
• Not eligible for PAA
Treatment
• derecognise the original contract and
• recognise the modified contract as a new contract
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IFRS 17 | INSURANCE CONTRACTS

Derecognition
2. Initial 3. Subsequent
1. Recognition 4. Modifications 5. Derecognition
Measurement Measurement

WHEN

• When a contract is extinguished (obligation expired or discharged)

• When modified per conditions in IFRS 17 (previous slide)

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