IFRS 17: Insurance Contracts

Presented by: Wasequl H Reagan, MSc. (MBS, UK), ACA (ICAEW), AQ (ICAEW), FCA (ICAB)
Partner, Mahfel Huq & Co., Chartered Accountants
 2
IFRS 17: Insurance Contracts

OVERVIEW

01. Existing issues 02. Present situation:

Bangladesh

03. IFRS 17: Insurance Contracts

04. Overview of IFRS 17

05. Timeline 06. The measurement models

General Measurement
07. Model or Building Block 08. Premium Allocation
Approach
Approach

09. Variable Fee

Approach
10. Implementation and
how ICAB can help
IFRS 17: Insurance Contracts
The existing issues
Headline Issues Examples Analysis Issues
▪ Use of outdated
assumptions
▪ Options and guarantees Fundamental economics are
not fully reflected in not necessarily reflected in
Lack of useful information measurement of insurance the reported IFRS numbers.
Lacking relevant and contracts
transparent information from ▪ Use of ‘expected RoA held’
accounting as discount rate
• Profits recognised at
Lack of transparency about different points Comparing companies by
profitability • Use of many non-IFRS source of profitability is a
measures needlessly difficult task
Lack of comparability among • Insurance companies
insurers report insurance contracts
using different practices

The point is lost.

Little comparability Inconsistency with other • Revenue reported on a
industries cash basis

Non-uniform reporting within • Subsidiaries are

groups consolidated using various
practices

Source: https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-17/webinar-understanding-ifrs-17/nss-webinar-slides.pdf?la=en
IFRS 17: Insurance Contracts

Bangladesh: Present situation

Presentation of Financial Statements
❖ Financial statements are prepared using Insurance Act, 1938 and
Insurance Rules 1958;
❖ IFRS although required by Financial Reporting Act 2015 (FRA 2015),
is not followed consistently as formats are taken from the Insurance
Act 1938 which are almost 82 years old and not in compliance with
IAS/IFRS; Bangladesh’s insurance
❖ A number of statements (e.g., revenue accounts) are prepared which industry faces presentation,
are inconsistent with IFRS; recognition and
measurement issues leading
to cross industry
Line items within the Financial Statements:
comparability issues
amongst many other issues.
❑ Within the financial statements (e.g., revenue accounts) premium is
not recognised and measured as per IFRS ;
❑ Acquisition cost is not amortized;
❑ Insurance contract liabilities are not accounted for in line with IFRS.
❑ Materiality and aggregation guidance in IAS1 is not adhered to.
IFRS 17: Insurance Contracts
The presentation and measurement difference: current vs. target state (non-
life insurance business)
IFRS 17: Insurance Contracts

IFRS 17: Insurance contracts

❑ IFRS 17 is the first truly international, comprehensive accounting standard for insurance
contracts;
❑ IFRS 17 replaces a current interim standard –IFRS-4
-requires consistent accounting for all insurance contracts based on current
measurement model;
-it provides useful information about the profitability of insurance contracts;

❑ IFRS 17 provides
-updated information about obligations, risks and performance of insurance contracts;
-increases transparency in financial information reported by insurance companies;
❑ IFRS 17 applies to all entities that issue insurance contracts and hence primarily going to affect
the entities in the insurance industry;

❑ Excluded from the scope:

× product warranties, residual value guarantees issued by manufacturer, dealer or retailer;
× employee assets and liabilities from employee benefit plans and retirement benefit obligations
from retirement benefit plans;
× financial guarantee contracts and fixed fee service contracts (uncertain future service for a fixed
fee), or if the entity holds the contract as a policyholder (unless those are reinsurance contracts
held),
× contingent consideration receivable/payable in a business combination;
IFRS 17: Insurance Contracts
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. If there is no contractual due
date, the first payment from the policyholder is deemed to be due when it is received.

❑ If there is no contractual due date, the first payment from the policyholder is deemed to be due when it is
received.

❑ In recognising a group of insurance contracts in a reporting period, an entity shall include only contracts
that individually meet one of the criteria set out above.
IFRS 17: Insurance Contracts

Overview: Financial Reporting Impact

• IFRS 17 requires a current measurement model, where estimates are re-measured in each
reporting period.
Balance Sheet • The measurement is based on the general measurement model (also known as building blocks-the
default model) of discounted, probability-weighted cash flows, a risk adjustment, and a
contractual service margin (‘CSM’) representing the unearned profit of the contract.

• Requirements in IFRS 17 align the presentation of revenue with other industries.

• Investment components are excluded from insurance revenue.
Income statement • Under IFRS 17, entities have an accounting policy choice to recognize the impact of changes in
discount rates in profit or loss or in other comprehensive income (‘OCI’) to reduce some volatility
in profit or loss.

• IFRS 17 disclosures will be more detailed than required under current reporting frameworks.
Disclosures • Disclosures will provide additional insight into key judgements and profit emergence.
• Disclosures are designed to allow greater comparability across entities.
IFRS 17: Insurance Contracts
IFRS 17: The salient differences

Variety of treatments depending on type of Consistent accounting for all insurance

contract and company contracts by all companies

Estimates for long-duration contracts not Estimates updated to reflect current

updated market-based information

Discount rate based on estimates does not Discount rate reflects characteristics of the
reflect economic risks cash flows of the contract

Lack of discounting for measurement of Measurement of insurance contract reflects

some contracts time value where significant

Little information on economic value of Measurement reflects information about

embedded options and guarantees full range of possible outcomes
IFRS 17: Insurance Contracts

Timeline

Insurance Exposure
Discussion Draft of Effective
project
paper revised date
started
Mar Jan Jul proposals May
2004 2005 2010 2017

1997 May Jun 1st Jan

IFRS 2007 Exposure
2013 2023
IFRS 4 IFRS 17
standards Draft of
issued issued
adopted in proposals
Europe

One of the most complicated standards

requiring almost 20 years to be issued.
IFRS 17: Insurance Contracts
Measurement models

General measurement Variable fee

Premium allocation
model (GMM) or Building
Block Approach (BBA) approach (PAA) approach

Why needed? To simplify for short term To deal with participating

Default model for all business where payments to
contracts with little
insurance contracts policyholders are linked to
variability
underlying items like assets

• Long-term and whole life

insurance, protection
business
• Certain annuities • General insurance
Types of contract • Unit-linked contracts and equity
• Universal life • Short-term life and index-linked contracts etc.
certain group contracts
• Reinsurance written
• Certain general insurance
contracts

Mandatory Mandatory Optional Mandatory

IFRS 17: Insurance Contracts
Switching models

Current General Model PAA

Practice
Contractual Service Qualifying for the PAA
Margin Automatically available for
contracts with coverage period
Unexpired risk

twelve months or less.

Risk adjustment Premium (less
Unlikely that all contracts
UPR less DAC acquisition costs)
will automatically qualify for
unearned
Discounting PAA model.
Mixed measurement models within
Expected value of a reportable segment may make
future cash flows results difficult to interpret.

Drivers of profit
Risk adjustment Risk adjustment Changes to yield curves will
require better asset liability
matching to manage income
Expired risk

Undiscounted statement volatility.

reserves for past Discounting Discounting
No prescribed method for
claims
measuring the risk adjustment but
entity required to disclose
Expected value of Expected value of methodology and confidence level
future cash flows future cash flows and expected to be consistent year
on year.
IFRS 17: Insurance Contracts
Key Components of General Measurement Model (GMM)/Building
Block Approach (BBA)- The default model

CSM at inception, is the difference between premium received and the

fulfilment cash flows. CSM is there to prevent gain on policy inception.
Contractual
Unearned profits are recognized over coverage period (there are
service margin
exceptions!!). If this total is negative then we have a loss component instead
of the CSM, this holds for onerous contracts.

The money the insurer wants to get on top of the cash flows in order to take
Risk adjustment the uncertainty of the insurance contract. So this is for the insurance risk,
the non-financial and non-hedgeable risk.

Discount future cash flows using rates to reflect the characteristics of the
Discounting
liabilities in terms of timing, currency, and liquidity.

An explicit, unbiased and probability-weighted estimate (i.e., expected value)

Probability weighted of the present value of the future cash outflows minus the present value of
expected future the future cash inflows that will arise as the entity fulfils insurance contracts,
cash flows including a risk adjustment for non-financial risk (e.g., mortality or morbidity
risks).
IFRS 17: Insurance Contracts
General Measurement Model (GMM)

Contractual service
margin

Risk adjustment

Discounting

Best estimate of
fulfilment cash
flows

Expired and unexpired

risk
IFRS 17: Insurance Contracts

Key Components of Insurance Contracts Liability

- -
Cash Risk
Outflow + Adjustment
Time Value
+
Cash Inflow
Contractual
Service
Margin
(CSM)

Estimates of Present value of Future cash flows Risk Adjustment CSM

IFRS 17: Insurance Contracts

GMM: Best estimate of fulfilment cash flows

▪ Consistent with observable market prices and non-market;

Contractual service ▪ Current estimate- to be updated at the end of every reporting
margin period;
▪ Probability-weighted mean of range of possible outcomes;
▪ Entity perspective for other cash flow estimates;
Risk adjustment ▪ Incorporates all available information in unbiased way;
▪ Include both intrinsic value and time value of options, forwards
and guarantees.

Discounting

Best estimate of
fulfilment cash
flows

Expired and unexpired risk

IFRS 17: Insurance Contracts

GMM: Discounting
Discount rates should:
Contractual service ▪ Reflect the time value of money, the characteristics of the
margin cash flows and the liquidity characteristics of the insurance
contracts;
▪ Be consistent with observable current market prices for
financial instruments with cash flows whose characteristics
Risk adjustment are consistent with those of the insurance contracts, in terms
of, for example, timing, currency and liquidity;

Discounting

Best estimate of
fulfilment cash flows

Expired and unexpired risk

IFRS 17: Insurance Contracts

GMM: Risk Adjustment

Contractual service
margin
Risk adjustment should be:
▪ Explicit
▪ Company perspective
Risk adjustment ▪ Consider risk arising from contract only
▪ Non-hedgeable risks only
▪ Fulfilment value

Discounting

* Entities will be required to disclose the confidence level

Best estimate of
fulfilment cash flows

Expired and unexpired risk

IFRS 17: Insurance Contracts

GMM: Contractual service margin

▪ Amortized
Contractual o Over coverage period in systematic way reflecting
service margin provision of coverage/service
o Service is provided on basis of passage of time (stand
ready obligation) and based on the coverage units
reflecting expected duration and quantity of benefits
Risk adjustment ▪ CSM cannot be negative (unless ceded reinsurance held) –
once CSM is reduced to zero, expected losses arising will be
immediately recognized in P/L
▪ Previously recognized losses can be reversed arising from
favorable changes in estimates
Discounting
▪ Adjusted for changes in risk and estimates of the fulfilment
cash flows related to future services

Best estimate of
fulfilment cash flows

Expired and unexpired risk

IFRS 17: Insurance Contracts

General Measurement Model : Simplified Illustration

XYZ Ltd. has a 31st December year end. XYZ Ltd. issues a group of insurance contracts on 1st January 20X3 for 3 years and premiums are
BDT 220 per annum (all to be paid upfront). Expected claims are BDT160 per annum. Actual claims of BDT 20, BDT 90 and BDT 190 were
paid in 20X3, 20X4 and 20X5 respectively. XYZ Ltd. estimates that it would have to pay out BDT 480 and requires a risk adjustment of BDT
42. For simplicity let us assume that the time value of money has been accounted for in the cash flows and risk variability does not
change significantly. XYZ Ltd. wants to make a profit of BDT 138 on these group of insurance contracts.
Solution:
Net estimated cash outflow: BDT 480 (160+160+160), and
Non financial risk adjustment (NFRA): BDT 42 and
Contractual service margin (CSM) BDT 138.
Premium is priced at BDT 660 (480+42+138);
Net cash flow (NCF) therefore is BDT 180 (660-480). Insurance contract
liability
components
(“building blocks”)

NCF NFRA CSM Total

01/01/X3 BDT BDT BDT BDT

Total liability
New contracts 180 (42) (138) - carried forward

Cash (660) - - (660)

LCR c/f (480) (42) (138) (660)

IFRS 17: Insurance Contracts
General Measurement Model : Basic Illustration
(contd.)
NCF NFRA CSM Total

01/01/X3 BDT BDT BDT BDT

New contracts 180 (42) (138) -

Cash (660) - - (660)

LCR c/f (480) (42) (138) (660)

During X3 (P&L) 160 14 46 220

31/12/x3 (320) (28) (92) (440)

During X4 (P&L) 160 14 46 220

313/12/X4 (160) (14) (46) (220)

During X5 (P&L) 160 14 46 220

31/12/X5 0 0 0 0
IFRS 17: Insurance Contracts
General Measurement Model : Basic Illustration
(contd.)

20X3 20X4 20X5

Statement of Profit and Loss
BDT BDT BDT

To cover claims 160 160 160

Amortization of NFRA 14 14 14

Recognition of CSM 46 46 46

Insurance revenue 220 220 220

Claims Expense (20) (90) (190)

Insurance expense (20) (90) (190)

Insurance result 200 130 30

IFRS 17: Insurance Contracts
Premium Allocation Approach (PAA)
The way of calculating the insurance contract liability once a policyholder has indicated a claim is
not different, the only difference is for the coverage period. With PAA there is a simplified method,
comparable with how insurers currently do, while with GMM are the cash flows, discounting, risk
adjustment and CSM calculated.

▪ Liability for Remaining Coverage, for unexpired risk, is accounted for using an Unearned Premium
Reserve

▪ Do not need to calculate a CSM

▪ Companies can leverage current reserve estimates, with applicable adjustments

IFRS 17: Insurance Contracts
Eligibility: Premium Allocation Approach (PAA)
Factors to consider
Contract boundaries under
IFRS 17
Variability in your expectation
of the present value of future
cash flows
No definition of “material”
or “significant”
Decision tree
Is the coverage period one year Yes
or less?
No
At inception, would the PAA
differ materially from the BBA
(LFRC only)?
Is significant variability in
the fulfilment cash flows
expected (which may affect
the measurement of the
liability for remaining
coverage during the period
before a claim is incurred)?
Possible impact on
lines of business
PAA is All (re)insurance
automatically contracts with
applicable coverage period of 1
year or less
May be possible Property damage type
No
to construct an multi-year policies of 2
argument that to 3 years, some
PAA is applicable reinsurance contracts
? More challenging
to construct an Construction, energy,
engineering, A&H,
argument that
credit etc.
PAA is applicable
IFRS 17: Insurance Contracts
PAA: Simplified Illustration

Assume, XYZ Ltd. issues an insurance contract for BDT 1,200 on 01 July 20X1 for a period of 12 months and receives the
premium upfront. The acquisition cost was BDT 180 paid on 01 July 20x1. Assume no claim was incurred during the
period. XYZ Ltd. reports quarterly. Show the Journal entries.
Journal entries: Reporting date 01/07/X1 30/09/X1 31/12/X1 31/03/X2 30/06/x2
Initial recognition Opening Balance 0 (1,020) (765) (510) (255)
Premium received on initial recognition (1,200)
Insurance acquisition cash flows 180
Dr Cash 1,200 Premium received in the period - - - -
Cr Insurance contract liability 1,200 Amortization of insurance acquisition (45) (45) (45) (45)
Cash Flows
- 300 300 300 300
Dr Insurance contract liability 180 Insurance revenue
Cr Cash 180 Closing balance of Insurance contract (1,020) (765) (510) (255) 0
asset/(liability)
At each reporting date i.e., 30/09/X1, 31/12/X1,
31/03/X2 and 30/06/X2
Amortization of acquisition costs
Dr Insurance service expenses 45
Cr Insurance contract liability 45
To record revenue
Dr Insurance contract liability 300
Cr Insurance revenue 300
IFRS 17: Insurance Contracts

The basics: Variable Fee Approach

Eligibility

▪ The contractual terms specify that the policyholder participates in a defined share of a clearly identified pool
of underlying items.
▪ The entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns
from the underlying items; and

Typical types of insurance contracts

▪ Unit linked with Rider benefits and/or other material insurance benefits
▪ Variable annuities

**Application is mandatory for insurance contracts with policyholder participation features.

IFRS 17: Insurance Contracts

Disclosures

• Detailed roll forward schedules and reconciliations

• Reconciliation of sources of profit
Amounts • Contracts written in the period
• Relationship interest and investment return

• Processes to estimate inputs to methods

Significant • Effect of changes in methods and inputs
judgements • Confidence level for determining risk adjustment
• Yield curve(s) used to discount cash flows

• Nature and extent of risks

Nature and extent • Insurance risk on gross/net basis
of risks • Concentrations of insurance risk and claims development
• Quantitative disclosures about non-insurance risks
IFRS 17: Insurance Contracts

Transition

• Effective date is 1 January 2023, but at least 1 year of comparative numbers required
• Transition is retrospective, so historic data is required.
• Transition is aimed at determining the CSM on the transition date.
• Impact of transition is recognized in opening equity

Approach

Full retrospective approach

When historical data exists and hindsight is
not required

If impracticable

Modified retrospective approach

Measurement at fair value
When not all historical information is available but
When no historical information about cash flows is
information about historical cash flows is available
available to determine the CSM
or can be constructed
IFRS 17: Insurance Contracts

Implementation: From data to financial reporting

Source Data Data Mining

Separation of insurance contracts

Take out embedded derivatives, non-insurance
service and investment components Data Analytics

Aggregation of contracts
Contracts can only be grouped together if issued within a
Data tagging
year apart, product type, onerous etc.

Measurement
Modelling
Apply one of the three measurement models with guidance on
fulfilment of cash flows, risk adjustment, discounting, CSM.

Presentation and disclosure

Data mapping,
Revenue presentation- separate contracts issued or held separately. extraction and
Categorize as assets or liabilities, separate amounts into insurance reconciliation
finance or service. Disclosures relate to revenue derived from
insurance business, assumptions and judgements.

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IFRS 17: Insurance Contracts 30

Summary implementation road map: Bangladesh Perspective

Less
than 6 Consult with stakeholders (e.g., Business impact and gap analysis
months BIA, FRC, ICAB, actuaries, BSEC and mapping exercise for both life
left etc.) set a plan and a timeframe and non-life insurance business

Develop policies and

procedures, establish data
governance, capacity
development
Identify implementation
steps, challenges, data and
technology requirements

Run parallel
Financial Reporting
reporting
and validate output aligned with IFRS
IFRS 17: Insurance Contracts
How ICAB can help
❑ Form a working group to carry out a gap analysis and mapping exercise between current practices and target state;

❑ The said working group to work with actuaries to identify their requirements for compliance with the latest standard;

❑ Can help regulator prepare and disseminate step by step implementation guidelines;

❑ Can help to develop a common structure for implementation of IFRS 17 that Life and Non-Life Insurance companies
which can later be customized from an individual company’s perspective;

❑ ICAB can liaise with regulatory bodies like IDRA, FRC and BSEC on IFRS 17 implementation to have a common
understanding among the Regulators;

❑ ICAB can communicate with BIA to implement IFRS 17 for Companies in the Insurance Sector;

❑ ICAB can arrange seminars to discuss related queries from the stakeholders;

❑ ICAB can help produce guidance for auditors doing the audit of financial statements reflecting IFRS 17;
IFRS 17: Insurance Contracts
Summary
▪ Bangladesh is in a critical juncture for graduating to a middle income country by 2026 and it is imperative that financial reporting in
the insurance sector is done in accordance with IFRS.
▪ Financial Reporting Act, 2015 requires that financial statements of public interest entities to which the insurance industry belong
are prepared in accordance with IFRS.
▪ IFRS 17 is applicable for entities that issue insurance contracts from 01st January, 2023 which is less than 6 months away.
▪ IFRS 17: Insurance Contracts took 20 years to be issued highlighting the complexity of the standard and overcomes many
challenges posed by the interim standard IFRS 4.
▪ IFRS 17 ensures more transparent and comparable financial statements.
▪ IFRS 17 permits 3 models for measurement of insurance contracts liability which are building block approach or general
measurement model (default model), premium allocation approach (PAA) and variable fee approach (VFA).
▪ The default model has four building blocks that insurers will need to measure. These are estimates of fulfilment cash flows, risk
adjustment, discounting and contractual service margin. Where applicable following this method is mandatory.
▪ PAA model for measuring insurance contract liability is a simpler approach primarily applicable for insurance contracts with
duration of 1 year or less. This method is optional.
▪ VFA model is mandatory for insurance contracts with policyholder participation features.
▪ Significant amount of disclosures are required under IFRS 17 including sources of profit, roll forward schedule, reconciliation,
Processes to estimate inputs to methods effect of changes in methods and inputs, judgments and risks in addition to confidence
level are also required.
▪ 3 approaches are permitted for transition which are full retrospective, modified retrospective and fair value method is permitted.
The last method is only permitted when no historical information regarding CSM is present.
▪ Data and system are key. Extensive preparation in terms of data, system, policies and procedures along with meaningful
participation from all stakeholders is crucial.
▪ ICAB being the premier accountancy body in Bangladesh is ready to help this transition to IFRS 17 and can play pivotal role in
successful implementation of the IFRS 17in Bangladesh.
THANK YOU FOR YOUR TIME AND ATTENTION