IFRS 17: Insurance Contracts

• IFRS 17 establishes principles for recognition, measurement, presentation, and disclosure of insurance contracts.
• The objective of IFRS 17 is to ensure entities provide relevant information that faithfully represents insurance contracts.
• This information allows financial statement users to assess the impact of insurance contracts on an entity's financial position, performance, and cash flows.

Scope of IFRS 17

• Applies to insurance contracts issued, including reinsurance contracts.
• Also applies to reinsurance contracts held.
• Includes investment contracts with discretionary participation features (DPF) if the entity also issues insurance contracts.
• Some contracts meeting the definition of an insurance contract are in the scope unless the entity applies IFRS 15, provided specific conditions are met.
• The conditions involve the entity not assessing individual customer risk in pricing, compensating customers with services instead of cash, and insurance risk arising primarily from customer service use.

Key Definitions

• Insurance contract: A contract where the issuer accepts significant insurance risk from the policyholder, compensating them for specified uncertain future events.
• Portfolio of insurance contracts: Insurance contracts subject to similar risks and managed together.
• Contractual service margin (CSM): Represents unearned profit recognized as services are provided under the contracts.
• Insurance risk: Risk transferred from contract holders to the issuer, excluding financial risk.
• Fulfilment cash flows (FCF): Expected value of future cash outflows less inflows, discounted to present value, including a risk adjustment for non-financial risk.
• Risk adjustment for non-financial risk: Compensation for uncertainty about the amount and timing of cash flows from non-financial risk.

Separating Components

• Insurance contracts may contain investment or service components that would fall under other standards if separate.
• IFRS 9 is applied to determine if an embedded derivative should be separated.
• Investment components are separated from the host insurance contract if they are distinct, and IFRS 9 is applied to them.
• Promises to transfer distinct non-insurance goods or services are accounted for under IFRS 15.

Level of Aggregation

• Entities must identify portfolios of insurance contracts with similar risks managed together.
• Contracts within a product line are expected to have similar risks and be in the same portfolio if managed together.
• Each portfolio must be divided into groups of contracts that are onerous at initial recognition, have no significant possibility of becoming onerous, and the remaining contracts.

Recognition

• An entity recognizes a group of insurance contracts from the earliest of these dates: the beginning of the coverage period, when the first payment is due, or when the group becomes onerous.

Measurement

• Initially, insurance contracts are measured at the total of the fulfilment cash flows (FCF) and the contractual service margin (CSM).
• FCF comprises estimates of future cash flows, adjustments for the time value of money and financial risks, and a risk adjustment for non-financial risk.
• All future cash flows within the contract boundary are included.
• Estimates of future cash flows must be current, explicit, unbiased, and reflect available information.

Discount Rates

• Discount rates should reflect the time value of money, the characteristics of the cash flows, and contract liquidity.
• They should be consistent with observable current market prices of financial instruments with similar cash flow characteristics.
• Discount rates should exclude factors that influence market prices but do not affect the future cash flows.

Contractual Service Margin

• CSM represents the unearned profit of a group of insurance contracts.
• It is measured at initial recognition to result in no immediate income or expenses, unless the group is onerous.

Subsequent Measurement

• The carrying amount of a group of insurance contracts is the sum of the liability for remaining coverage and the liability for incurred claims.
• The liability for remaining coverage includes the FCF related to future services and the CSM.
• The liability for incurred claims includes the FCF related to past service.

Onerous Contracts

• An insurance contract is onerous if the total of the FCF, acquisition cash flows, and any cash flows from the contract is a net outflow.
• A loss is recognized in profit or loss for the net outflow, setting the CSM to zero.
• If a group becomes more onerous, the excess is recognized in profit or loss and the CSM cannot increase until the previously recognized onerous amount is reversed.

Premium Allocation Approach (PAA)

• Simplifies measurement of the liability for remaining coverage if it reasonably approximates the general model or the coverage period is one year or less.
• PAA is not applicable if significant FCF variances are expected before a claim is incurred.
• The liability for remaining coverage is initially recognized as received premiums minus acquisition cash flows.
• Subsequently, the carrying amount is adjusted for premiums, acquisition cash flows, revenue, and investment components.
• Under PAA, discounting the liability for remaining coverage is not required if the time between coverage and premium due date is no more than a year.
• Acquisition cash flows can be expensed when incurred if the coverage period is no more than a year.
• The simplifications do not apply to the liability for incurred claims, but discounting is unnecessary if the balance is expected to be paid within one year.

Investment Contracts with a DPF

• Investment contracts with a DPF are financial instruments without significant insurance risk transfer.
• They are within the scope only if the issuer also issues insurance contracts.
• The standard's requirements are modified for these investment contracts.

Reinsurance Contracts Held

• Requirements are modified for reinsurance contracts held.
• Estimates of future cash flows use assumptions consistent with related direct insurance contracts, including the risk of reinsurer non-performance.
• Risk adjustment represents the transfer of risk from the holder to the reinsurer.
• The CSM is determined similarly to direct insurance contracts, except that it represents the net gain or loss on purchasing reinsurance and is deferred.
• Subsequently, they are accounted for similarly to insurance contracts under the general model.

Modification and Derecognition

• If contract terms are modified, the original contract is derecognized and the modified contract is recognized as new if there is a substantive modification.
• Modification is substantive if it would lead to exclusion from the standard’s scope, unbundling of embedded derivatives, redefinition of the contract boundary, or reallocation to a different group of contracts.
• An entity derecognizes an insurance contract when it is extinguished or if substantive modification conditions are met.

Presentation in the Statement of Financial Position

• An entity must present separately the carrying amount of groups of insurance contracts issued that are assets, insurance contracts issued that are liabilities, reinsurance contracts held that are assets, and reinsurance contracts held that are liabilities.

Recognition and Presentation in the Statement(s) of Financial Performance

• Amounts are disaggregated into an insurance service result and insurance finance income or expenses.
• Income or expenses from reinsurance contracts held are presented separately from those of insurance contracts issued.
• The insurance service result includes insurance revenue and insurance service expenses, excluding investment components.

Insurance Finance Income or Expenses

• Comprises changes in the carrying amount due to the time value of money and changes in assumptions related to financial risk.
• Excludes changes for direct participating insurance contracts that would instead adjust the CSM.
• An entity can choose to include all insurance finance income or expense in profit or loss, or disaggregate it between profit or loss and other comprehensive income (OCI).

Disclosures

• Qualitative and quantitative information must be disclosed about amounts recognized in financial statements, significant judgments made, and the nature and extent of risks from insurance contracts.

Effective Date and Transition

• IFRS 17 is effective for annual reporting periods beginning on or after January 1, 2023.
• Earlier application is permitted if IFRS 15 and IFRS 9 have also been applied.
• An entity must apply the standard retrospectively unless impracticable, with options for the modified retrospective approach or the fair value approach.