IFRS 17 Insurance Contracts

Overview
In March 2004 the International Accounting Standards Board (Board)
issued IFRS 4 Insurance Contracts (IFRS 4). IFRS 4 was an interim Effective Date
standard which was meant to be in place until the Board completed its IFRS 17 is effective for annual periods
project on insurance contracts. In May 2017, the Board completed its beginning on or after 1 January 2023.
project on insurance contracts with the issuance of IFRS 17 Insurance Earlier application is permitted.
Contracts (IFRS 17). IFRS 17 replaces IFRS 4 and sets out principles for
the recognition, measurement, presentation and disclosure of insurance
contracts within the scope of IFRS 17. It also requires similar principles to be applied to reinsurance contracts held and
investment contracts with discretionary participation features issued.

What will change?

IFRS 17 requires a company to measure insurance contracts using updated estimates and assumptions that reflect the
timing of cash flows and any uncertainty relating to insurance contracts. This requirement will provide transparent
reporting about a company’s financial position and risk.

IFRS 17 requires a company to recognise profits as it delivers insurance services (rather than when it receives premiums)
and to provide information about insurance contract profits the company expects to recognise in the future. This
information will provide metrics that can be used to evaluate the performance of insurers and how that performance
changes over time.

IFRS 4 - Little transparent or useful IFRS 17 - More transparent and useful

information information
Information about the value of insurance obligations
Some companies measure Companies will measure insurance
insurance contracts using out-of- contracts at current value.
date information.
Some companies do not consider Companies will reflect the time value of
the time value of money when money in estimated payments to settle
measuring liabilities for claims. incurred claims.
Some companies measure Companies will measure their insurance
insurance contracts based on the contracts based only on the obligations
value of their investment portfolios. created by these contracts.

Information about profitability

Some companies do not provide
consistent information about the
sources of profit recognised from
insurance contracts.
Many companies provide
alternative performance measures,
i.e. non-GAAP measures, to
supplement IFRS 4 information,
such as embedded value
information.
Companies will provide consistent
information about components of current
and future profits from insurance
contracts.
Companies and users of financial
statements will use fewer non-GAAP
measures. Supplementary information
will enable more meaningful
comparisons.
 IFRS 17 Insurance Contracts

The key principles in IFRS 17 are that an entity:

 identifies as insurance contracts those contracts 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 specified embedded derivatives, distinct investment components and distinct performance obligations
from the 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 of
the available information about the fulfilment cash flows in a way that is consistent with observable
market information;
 plus (if this value is a liability) or minus (if this value is an asset) an amount representing the unearned
profit in the group of contracts (the contractual service margin).
 recognises the 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 or becomes loss-making, an entity recognises the
loss immediately.
 presents separately insurance revenue, insurance service expenses and insurance finance income or expenses.
 discloses information to enable users of financial statements to assess the effect that contracts within the scope
of IFRS 17 have on the financial position, financial performance and cash flows of an entity. To do this, an entity
discloses qualitative and quantitative information about:
 the amounts recognised in its financial statements from insurance contracts;
 the significant judgements, and changes in those judgements, made when applying the Standard; and
 the nature and extent of the risks from contracts within the scope of this Standard.

Objective and Scope

Objective: IFRS 17 Insurance Contracts Scope: An entity shall apply to IFRS 17 to :

establishes principles for the recognition,
measurement, presentation and disclosure  Insurance contracts, including reinsurance contracts, it
of insurance contracts within the scope of issues;
the Standard. The objective of IFRS 17 is to  Reinsurance contracts it holds; and
ensure that an entity provides relevant  Investment contracts with discretionary participation features
information that faithfully represents those it issues, provided the entity also issues insurance contracts.
contracts. This information gives a basis for
users of financial statements to assess the
effect that insurance contracts have on the
entity’s financial position, financial
performance and cash flows.

Recognition

An entity shall recognise a group of insurance contracts it issues from the earliest of the following:
 the beginning of the coverage period of the group of contracts;
 the date when the first payment from a policyholder in the group becomes due; and
 for a group of onerous contracts, when the group becomes onerous.
 IFRS 17 Insurance Contracts

Measurement

Measurement on initial recognition

Initial measurement On initial recognition, an entity shall measure a group of insurance
contracts at the total of:
(a) the fulfilment cash flows, which comprise:
(i) estimates of future cash flows;
(ii) an adjustment to reflect the time value of money and the financial risks
related to the future cash flows, to the extent that the financial risks are not
included in the estimates of the future cash flows; and
(iii) a risk adjustment for non-financial risk.
(b) the contractual service margin.
Estimates of future The estimates of future cash flows shall:
cash flows (a) incorporate, in an unbiased way, all reasonable and supportable
information available without undue cost or effort about the amount, timing and
uncertainty of those future cash flows. To do this, an entity shall estimate the
expected value (i.e. the probability-weighted mean) of the full range of possible
outcomes.
(b) reflect the perspective of the entity, provided that the estimates of any
relevant market variables are consistent with observable market prices for
those variables.
(c) be current - the estimates shall reflect conditions existing at the
measurement date, including assumptions at that date about the
future.
(d) be explicit - the entity shall estimate the adjustment for non-financial risk
separately from the other estimates. The entity also shall estimate the cash
flows separately from the adjustment for the time value of money and financial
risk, unless the most appropriate measurement technique combines these
estimates.
Discount rates The discount rates applied to the estimates of the future cash flows shall:
(a) reflect the time value of money, the characteristics of the cash flows and
the liquidity characteristics of the insurance contracts;
(b) be consistent with observable current market prices (if any) for financial
instruments with cash flows whose characteristics are consistent with those of
the insurance contracts, in terms of, for example, timing, currency and liquidity;
and
(c) exclude the effect of factors that influence such observable market prices
but do not affect the future cash flows of the insurance contracts.
Risk adjustment for An entity shall adjust the estimate of the present value of the future cash
non-financial risk flows to reflect the compensation that the entity requires for bearing the
uncertainty about the amount and timing of the cash flows that arises
from non-financial risk.
Contractual service The contractual service margin is a component of the asset or liability for the
margin group of insurance contracts that represents the unearned profit the entity will
recognise as it provides services in the future. An entity shall measure the
contractual service margin on initial recognition of a group of insurance
contracts at an amount that, unless the group of contracts is onerous, results in
no income or expenses arising from:
(a) the initial recognition of an amount for the fulfilment cash flows;
(b) the derecognition at the date of initial recognition of any asset or liability
recognised for insurance acquisition cash flows ; and
(c) any cash flows arising from the contracts in the group at that date.
 IFRS 17 Insurance Contracts

Subsequent measurement
Subsequent The carrying amount of a group of insurance contracts at the end of each
measurement reporting period shall be the sum of:
(a) the liability for remaining coverage comprising:
(i) the fulfilment cash flows related to future service allocated to the group at
that date;
(ii) the contractual service margin of the group at that date;
(b) the liability for incurred claims, comprising the fulfilment cash flows related
to past service allocated to the group at that date.
Contractual service The contractual service margin at the end of the reporting period represents
margin the profit in the group of insurance contracts that has not yet been recognised
in profit or loss because it relates to the future service to be provided under the
contracts in the group.
Onerous contracts An insurance contract is onerous at the date of initial recognition if the
fulfilment cash flows allocated to the contract, any previously recognised
acquisition cash flows and any cash flows arising from the contract at the date
of initial recognition in total are a net outflow.

An entity shall recognise a loss in profit or loss for the net outflow for the group
of onerous contracts, resulting in the carrying amount of the liability for the
group being equal to the fulfilment cash flows and the contractual service
margin of the group being zero.

On subsequent measurement, if a group of insurance contracts become

onerous (or more onerous), that excess shall be recognised in profit or loss.
Additionally, the loss component determines the amount that are presented in
profit or loss as reversals of losses on onerous group and are consequently
excluded from determination of insurance revenue.
Reinsurance contracts Use consistent assumptions to measure the estimates of the present value of
held the future cash flows for the group of reinsurance contracts held and the
estimates of the present value of the future cash flows for the group(s) of
underlying insurance contracts. In addition, the entity shall include in the
estimates of the present value of the future cash flows for the group of
reinsurance contracts held the effect of any risk of non-performance by the
issuer of the reinsurance contract, including the effects of collateral and losses
from disputes.

Determine the risk adjustment for non-financial risk so that it represents the
amount of risk being transferred by the holder of the group of reinsurance
contracts to the issuer of those contracts.

On initial recognition, the contractual service margin is determined similarly to

that of direct insurance contracts issued, except that the contractual service
margin represents net gain or loss on purchasing reinsurance. On initial
recognition, this net gain or loss is deferred, unless the net loss relates to
events that occurred before purchasing a reinsurance contract (in which case it
is expensed immediately).

Subsequently, reinsurance contracts held are accounted similarly to insurance

contracts under the general model. Changes in reinsurer’s risk of non-
performance are reflected in profit or loss, and do not adjust the contractual
service margin.
 IFRS 17 Insurance Contracts

Subsequent measurement (continued)

Premium allocation An entity may simplify the measurement of a group of insurance contracts
approach using the premium allocation approach if, and only if, at the inception of the
group:
(a) the entity reasonably expects that such simplification would produce a
measurement of the liability for remaining coverage for the group that
would not differ materially from the one that would be produced; or
(b) the coverage period of each contract in the group is one year or less.

Where, at the inception of the group, an entity expect significant variances in

the fulfilment cash flows during the period before a claim is incurred, such
contracts are not eligible to apply the premium allocation approach.

Using the premium allocation approach, an entity shall measure the liability for
remaining coverage as follows:
(a) the liability for remaining coverage shall be initially recognised as
premiums, if any, received at initial recognition, minus any insurance
acquisition cash flows.
(b) subsequently the carrying amount of the liability is the carrying at the start
of the reporting period plus the premiums received in the period, minus
insurance acquisitions cash flow, plus amortisation of acquisition cash flows,
minus the amount recognised as insurance revenue for coverage provided on
that period, minus any investment components paid or transferred to the
liability for incurred claims.
If insur anc e contr acts in the group have a signi ficant financing c omponent, the liability for r emai ning c overag e needs to be dis counted, however , this is not r equired if, at i nitial rec ogniti on, the entity expec ts that the time between provi ding each part of the cover age and the due date of the rel ated premium is no mor e than a year.
If insur anc e contr acts in the group have a signi ficant financing c omponent, the liability for r emai ning c overag e needs to be dis counted, however , this is not r equired if, at i nitial rec ogniti on, the entity expec ts that the time between provi ding each part of the cover age and the due date of the rel ated premium is no mor e than a year.

If insurance contracts in the group have a significant financing component, the

liability for remaining coverage needs to be discounted, however, this is not
required if, at initial recognition, the entity expects that the time between
providing each part of the coverage and the due date of the related premium is
no more than a year.
In applying premium allocation approach, an entity may choose to recognise
any insurance acquisition cash flows as an expense when it incurs those costs,
provided that the coverage period at initial recognition is no more than a year.

The simplifications arising from the premium allocation approach do not apply
to the measurement of the group’s liability for incurred claims, measured under
the general model. However, there is no need to discount those cash flows if
the balance is expected to be paid or received in one year or less from the date
the claims are incurred.
Investment contracts An investment contract with discretionary participation features does not
with discretionary include a transfer of significant insurance risk. The requirements
participation features of the Standard are modified for such investment contracts.
 IFRS 17 Insurance Contracts

Modification and Derecognition

Modification Derecognition
If the terms of an insurance contract are modified, an An entity shall derecognise an insurance
entity shall derecognise the original contract and contract when, and only when:
recognise the modified contract as a new contract, if,  it is extinguished, i.e. when the obligation
and only if, any of the conditions are satisfied. specified in the insurance contract expires
or is discharged or cancelled; or
The exercise of a right included in the terms of a  any of the conditions of a substantive
contract is not a modification. modification of an insurance contract are
met.
The conditions are that:
(a) if the modified terms had been included at
contract inception:
(i) the modified contract would have been
excluded from the scope of the Standard;
(ii) an entity would have separated different
components from the host insurance
contract, resulting in a different insurance
contract to which the Standard would
have applied;
(iii) the modified contract would have had a
substantially different contract boundary;
or
(iv) the modified contract would have been
included in a different group of contracts.
(b) the original contract met the definition of an
insurance contract with direct participation
features, but the modified contract no longer
meets that definition, or vice versa; or
(c) the entity applied the premium allocation
approach to the original contract, but the
modifications mean that the contract no
longer meets the eligibility criteria for that
approach.
 IFRS 17 Insurance Contracts

Presentation

Presentation in the statement(s) of financial Presentation in the statement(s) of financial

performance performance

An entity shall disaggregate the amounts recognised An entity shall present separately in the statement of
in the statement(s) of profit or loss and other financial position the carrying amount of groups of:
comprehensive income (hereafter referred to as the (a) insurance contracts issued that are assets;
statement(s) of financial performance) into:
(b) insurance contracts issued that are liabilities;
(a) an insurance service result, comprising
(c) reinsurance contracts held that are assets;
insurance revenue and insurance service
and
expenses; and
(d) reinsurance contracts held that are liabilities.
(b) insurance finance income or expenses.

An entity shall present income or expenses from

reinsurance contracts held separately from the
expenses or income from insurance contracts issued.

Insurance service result

An entity shall present in profit or loss revenue arising
from the groups of insurance contracts issued, and
insurance service expenses arising from a group of
insurance contracts it issues, comprising incurred
claims and other incurred insurance service expenses.
Revenue and insurance service expenses shall
exclude any investment components. An entity shall
not present premiums in the profit or loss, if that
information is inconsistent with revenue presented.

Insurance finance income or expenses

Insurance finance income or expenses comprises the
change in the carrying amount of the group of
insurance contracts arising from:
(a) the effect of the time value of money and
changes in the time value of money; and
(b) he effect of financial risk and changes in
financial risk; but
(c) excluding any such changes for groups of
insurance contracts with direct participation
features that would adjust the contractual
service margin but do not do so when
applying paragraphs 45(b)(ii), 45(b)(iii),
45(c)(ii) or 45(c)(iii). These are included in
insurance service expenses.
 IFRS 17 Insurance Contracts

Disclosure

To achieve that objective, an entity shall disclose qualitative and quantitative information about:
(a) the amounts recognised in its financial statements for insurance contracts;
(b) the significant judgements, and changes in those judgements, made when applying IFRS 17; and
(c) the nature and extent of the risks from insurance contracts.

Transition measurement

Determine transition
method by group
contracts applying
full retrospective
approach (applying
IAS 8).

Impracticable?

Choose between

Modified retrospective Fai value

-if necessary given

reasonable and
supportable information

-maximise full
retrospective information.

Insufficient reasonable and supportable information?