To establish comprehensive principles for the recognition, measurement, presentation, and disclosure of Insurance Contracts within its scope.
Replace the wide variety of accounting practices under the interim standard (IFRS 4) with a single, consistent, principle-based model.
Ensure entities provide relevant and useful information, giving a transparent view of an insurer's financial position, performance, and risk exposure, thereby increasing comparability.
Applies To:
Insurance contracts (including reinsurance contracts) issued by an entity.
E.g., A life insurance policy, a property and casualty auto insurance policy, an annuity contract that transfers significant mortality/longevity risk.
Reinsurance contracts held by an entity.
E.g., An insurer (cedant) paying a premium to another insurer (reinsurer) to cover a portion of its claims risk.
Investment contracts with discretionary participation features (DPF) issued by an entity, provided the entity also issues insurance contracts.
These are contracts where the policyholder shares in a pool of underlying items, and the entity has discretion over the payout.
Exclusions:
Warranties provided by a manufacturer, dealer, or retailer in connection with the sale of its own goods or services (IFRS 15 or IAS 37).
Employerā€™s assets and liabilities from employee benefit plans (IAS 19) and share-based payment transactions (IFRS 2).
Financial guarantee contracts (unless the issuer elects to apply IFRS 17, most are in scope of IFRS 9).
Contingent consideration in a business combination (IFRS 3).
Contracts where the entity is the policyholder (buyer of insurance), unless it's a reinsurance contract held. (e.g., A factory's fire insurance policy is a prepaid asset/expense).
Definition of an Insurance Contract:
A contract under which one party (the issuer) 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.
Insurance Risk: Any risk other than financial risk (like interest rate, commodity price, or equity market risk) transferred from the policyholder to the issuer. E.g., risk of fire, car crash, death, longevity, catastrophe.
Significance: The risk transferred must be significant. The insured event must cause the issuer to pay significantly more in present value terms than if the event did not occur. A contract with insignificant insurance risk is usually a financial instrument (IFRS 9).
Level of Aggregation (Unit of Account):
Entities must aggregate contracts for measurement.
Portfolio: First, group contracts subject to similar risks and managed together. (E.g., "Auto Insurance - North East", "Term Life - Ages 30-40").
Groups: Second, divide each portfolio into (at minimum) three groups based on expected profitability at inception:
Group 1: Onerous - Contracts that are loss-making at inception.
Group 2: No significant possibility of becoming onerous - Highly profitable at inception.
Group 3: Remaining - All other contracts in the portfolio.
Contracts issued more than one year apart cannot be in the same group. This grouping is critical: losses on onerous contracts (Group 1) must be recognized immediately in P&L and cannot be offset by profits from other groups.
Contract Boundary:
Cash flows are included in measurement only if they arise from substantive rights and obligations. The boundary ends when either party has the practical ability to stop payments or unilaterally reassess the price for the specific policyholder's risk.
E.g., For a 1-year auto policy, the boundary is one year, even if renewal is likely. Future renewal premiums/claims are outside the boundary.
The Measurement Models:
| Model |
Acronym |
Application (When to Use) |
Key Measurement Basis (Liability) |
| General Measurement Model |
GMM (or BBA) |
Default model. Mandatory unless PAA or VFA applies.
E.g., Long-term life, annuities, reinsurance held. |
FCF + CSM
(Fulfilment Cash Flows + Contractual Service Margin). |
| Premium Allocation Approach |
PAA |
Optional simplification if:
1. Coverage period ā‰¤ 1 year; OR
2. PAA measurement is not materially different from GMM. |
LRC: Based on unearned premium (simplified).
LIC: Based on FCF (GMM-style).
E.g., 1-year auto, home, fire insurance. |
| Variable Fee Approach |
VFA |
Mandatory modification of GMM for direct participation contracts (where entity shares in a pool of underlying items). |
GMM modified: CSM is also adjusted for changes in entity's share of the underlying items' fair value.
E.g., Unit-linked or "with-profits" life insurance. |
GMM: Building Block 1 - Fulfilment Cash Flows (FCF)
This is the present value of all expected future cash flows, comprising three "building blocks":
Estimates of Future Cash Flows: Unbiased, probability-weighted estimates of all inflows (premiums) and outflows (claims, benefits, acquisition costs, expenses) within the contract boundary.
Discount Rate: Adjusts for Time Value of Money (TVM). Must be a current, market-based rate reflecting the cash flows' characteristics (timing, currency, liquidity).
Risk Adjustment for Non-Financial Risk (RA): Explicit measure of compensation the entity requires for bearing uncertainty about the amount and timing of non-financial risks (e.g., mortality, catastrophe, lapse risk).
GMM: Building Block 2 - Contractual Service Margin (CSM)
This represents the unearned profit of the group of insurance contracts.
At initial recognition, the CSM is calculated to ensure no "day one" profit is recognized. It is the balancing figure making the initial liability equal the FCF + cash received.
The CSM is a liability. It is released into P&L (as revenue) over the coverage period as the entity provides insurance services. It is amortized, not remeasured for market changes.
Recognition and Measurement:
A group of contracts is onerous if, at inception, the Fulfilment Cash Flows (FCF) are a net outflow (i.e., PV of outflows + RA > PV of inflows).
This loss is recognized immediately in P&L.
The CSM for an onerous group is set to zero. The liability recognized is the FCF, and the P&L charge is the net loss.
E.g., A fixed-price healthcare policy group becomes onerous if a new, expensive standard medical treatment emerges, causing expected claims to exceed all future premiums. The expected loss is recognized immediately.
Statement of Financial Position:
Entities must present portfolios of insurance contracts issued as either net assets or net liabilities. The same applies to reinsurance contracts held.
The carrying amount of a group of contracts is the sum of:
Liability for Remaining Coverage (LRC): Represents future service. Includes FCF and CSM for the unexpired coverage.
Liability for Incurred Claims (LIC): Represents past service. Includes FCF for claims already occurred (including Incurred But Not Reported - IBNR).
Statement of Profit or Loss (P&L):
P&L must be disaggregated to show the sources of profit:
1. Insurance Service Result (Underwriting Profit/Loss):
Insurance Revenue: Recognized as coverage is provided (based on release of CSM, RA, and expected claims).
Insurance Service Expenses: Incurred claims and other service expenses.
2. Net Financial Income or Expense:
Shows finance impacts (e.g., interest accretion on the liability using the discount rate).
Policy Choice: Entities can choose to split finance impacts between P&L and OCI to reduce volatility (similar to IFRS 9 OCI option).
Required Disclosures:
IFRS 17 requires extensive qualitative and quantitative disclosures to explain amounts recognized and risks. Key areas include:
Reconciliations: Detailed "roll-forwards" showing movement in LRC and LIC, with separate columns for FCF and CSM, explaining estimate changes.
Judgments: Significant judgments and estimation techniques used (e.g., methods for discount rate, Risk Adjustment; assumptions on mortality, lapse rates).
Risk Exposure: Qualitative and quantitative information on risks (insurance, credit, liquidity), often including sensitivity analyses.
Analysis of Revenue: Breakdown of insurance revenue recognized and reconciliation to premiums received.
Fair Value: The fair value of insurance contract groups and methods used.
Initial Adoption:
The standard must be applied retrospectively (as if it had always been in place), unless impracticable.
The cumulative effect of adoption is recognized in the opening balance of retained earnings at the transition date (start of the annual period *preceding* the date of initial application).
E.g., For a Jan 1, 2023 adoption, transition date is Jan 1, 2022.
Transition Approaches (if Full Retrospective is Impracticable):
Modified Retrospective Approach: Uses full retrospective approach but allows specific, permitted modifications (e.g., using reasonable/supportable info if historical data is unavailable for grouping or rates).
Fair Value Approach: Used if modified approach is also impracticable. The CSM (unearned profit) at transition date is determined as: Fair Value of the group (at transition) minus FCF (at transition). This "backs into" the unearned profit.
