IFRS 17 - Insurance Contracts

1. Core Principle

The core principle of IFRS 17 is to ensure that an insurer provides relevant information that faithfully represents the insurance contracts it issues. This involves recognizing and measuring insurance contract liabilities based on the expected cash flows, reflecting the economic realities of the insurance business.

2. Key Components of IFRS 17

The standard introduces several key components related to the measurement of insurance contracts:

• Contractual Service Margin (CSM): The CSM represents the unearned profit of an insurance contract that will be recognized as the insurer provides services over the contract term. It is calculated as the difference between the expected present value of future cash inflows and outflows at the inception of the contract.
• Liability for Remaining Coverage (LRC): This liability reflects the insurer's obligation to provide coverage for future claims and is measured as the sum of the CSM and the expected future cash outflows related to the insurance contract.
• Liability for Incurred Claims (LIC): This liability represents the insurer's obligation to pay claims that have already been incurred but not yet settled. It is measured as the present value of expected future cash outflows related to these claims.

3. Measurement Models

IFRS 17 provides three measurement models for insurance contracts:

• General Measurement Model (GMM): This is the default approach for measuring insurance contracts, which involves estimating the expected cash flows, applying a discount rate, and recognizing the CSM.
• Premium Allocation Approach (PAA): This simplified model can be used for short-duration contracts (typically less than one year) and is similar to the unearned premium approach under IFRS 4. It allows insurers to recognize revenue based on the passage of time and claims incurred.
• Variable Fee Approach (VFA): This model applies to contracts where the policyholder participates in the insurer’s underlying items (e.g., investment contracts with profit sharing). It incorporates changes in the value of the underlying items in the measurement of the contract.

4. Presentation and Disclosure Requirements

IFRS 17 emphasizes transparency in the presentation and disclosure of insurance contracts, requiring insurers to provide detailed information, including:

• Statement of Financial Position: Insurers must present their insurance contract liabilities separately from other liabilities and disclose the components of the LRC and LIC.
• Profit or Loss Statement: Insurers need to present revenue and expenses arising from insurance contracts, including the recognition of the CSM and any adjustments to the liabilities.
• Risk Management: Insurers must disclose their risk exposure, including how they manage financial risks associated with insurance contracts.
• Significant Judgments: Insurers are required to disclose significant judgments and assumptions made in applying the standard, particularly those related to cash flow estimates and discount rates.

5. Overall Impact

The implementation of IFRS 17 represents a significant shift in the accounting for insurance contracts, promoting consistency and comparability across the insurance industry. By requiring insurers to recognize and measure insurance contract liabilities more transparently, the standard enhances the quality of financial reporting and provides stakeholders—including investors, analysts, and regulators—with a clearer understanding of an insurer's financial position and performance. This increased transparency fosters trust in the financial statements and supports better-informed decision-making in the insurance sector.