IFRS 17

IFRS 17

IFRS 17 supersedes IFRS 4 on insurance contract.

Who are likely to be most affected?

Almost all insurers are likely to be affected by IFRS 17. However, the CFO’s of the following insurers will have the most challenges:

• Issuers of long-duration insurance contracts, especially when these are measured using historical rather than current assumptions;li>
• Insurers that do not fully consider options and guarantees in their insurance contracts;
• Issuers of contracts with unit-linked and profit sharing features;
• Insurers that currently use expected investment returns on assets for discounting the insurance liabilities;
• Insurers that currently don’t reflect the time value of money in long duration contracts;
• Insurers that currently report underwriting revenue and expenses on a cash basis or when the revenue includes deposits;
• Insurers that currently provide limited disclosure about their insurance contracts and insurance risk;
• Multinational insurance groups whose subsidiaries use different accounting policies;
• And Reinsurers.

 

Main features

Definition: More or less similar to IFRS 4

Identification: Some non-insurance components should be separated and accounted for using other IFRSs

Recognition: An insurance contract is initially recognised when the coverage period begins or when the company concludes that the contract is onerous.

Contract boundaries: When the insurer no longer has substantive rights to receive premiums or obligations to provide services.

Initial measurement: The general approach is the Building Block Approach (BBA). BBA is based on the building blocks of:

• Future cash flows: a current, unbiased estimate of the cash flows expected to fulfil the insurance contract (expected cash flows from premiums, claims and benefits);
• Discounting: an adjustment for the time value of money (converting the future cash flows into current amounts consistent with market observable information);
• Risk adjustment: an adjustment for the effects of risk and uncertainty (an entity specific measure to reflect the uncertainty about the amount and timing of the cash flows); and
• Contractual Service Margin (CSM): the positive (net inflow) difference between the risk-adjusted present value of expected inflows and outflows at initial recognition. If CSM is negative it is recognised in profit or loss (onerous contract)

The measurement must incorporate all available information about the expected cash flows related to fulfilling the insurance contract and must be consistent with observable market information

Options and guarantees must be reflected in the measurement of the insurance contracts.