IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard.
IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on or after 1 January 2023.
IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts.
This information gives a basis for users of financial statements to assess insurance contracts’ effect on the entity’s financial position, financial performance and cash flows. [IFRS 17:1]
An entity shall apply IFRS 17 Insurance Contracts to [IFRS 17:3]
Ø Insurance contracts, including reinsurance contracts, it issues;
Ø Reinsurance contracts it holds; and
Ø Investment contracts with discretionary participation feature it issues, provided the entity also issues insurance contracts.
Some contracts meet the definition of an insurance contract but have as their primary purpose the provision of services for a fixed fee. Such issued contracts are in the scope of the standard unless an entity chooses to apply to them IFRS 15 Revenue from Contracts with Customers and provided the following conditions are met: [IFRS 17:8]
(a) the entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the contract with that customer;
(b) the contract compensates the customer by providing a service rather than by making cash payments to the customer; and
(c) the insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from uncertainty over the cost of those services.
Separating components from an insurance contract
An insurance contract might contain one or more components within the scope of another standard if they were separate contracts. For example, an insurance contract may include an investment or service component (or both). [IFRS 17:10]
The standard provides the criteria to determine when a non-insurance component is distinct from the host insurance contract.
An entity shall: [IFRS 17:11-12]
(a) Apply IFRS 9 Financial Instruments to determine whether there is an embedded derivative to be separated and, if so, how to account for such a derivative.
(b) Separate from a host insurance contract an investment component if, and only if, that investment component is distinct. The entity shall apply IFRS 9 to account for the separated investment component.
(c) After performing the above steps, separate any promises to transfer distinct non-insurance goods or services. Such promises are accounted for under IFRS 15 Revenue from Contracts with Customers.
Level of aggregation
IFRS 17 requires entities to identify portfolios of insurance contracts, which comprise contracts that are subject to similar risks and managed together. Contracts within a product line would be expected to have similar risks and hence would be expected to be in the same portfolio if they are managed together. [IFRS 17:14]
Each portfolio of insurance contracts issued shall be divided into a minimum of [IFRS 17:16]
- A group of contracts that are onerous at initial recognition, if any;
- A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any; and
- A group of the remaining contracts in the portfolio, if any.
An entity cannot include contracts issued more than one year apart in the same group. [IFRS 17:22]
If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity’s practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity may include those contracts in the same group.
An entity shall recognise a group of insurance contracts it issues from the earliest of the following: [IFRS 17:25]
(a) the beginning of the coverage period of the group of contracts;
(b) the date when the first payment from a policyholder in the group becomes due; and
(c) for a group of onerous contracts, when the group becomes onerous.
On initial recognition, an entity shall measure a group of insurance contracts at the total of [IFRS 17:32]
(a) the fulfilment cash flows (“FCF”), which comprise:
(i) estimates of future cash flows;
(ii) an adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the future cash flows; and
(iii) a risk adjustment for non-financial risk
(b) the contractual service margin (“CSM”).
An entity shall include all the future cash flows within the boundary of each contract in the group. The entity may estimate the future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual groups of contracts. [IFRS 17:33]
The estimates of future cash flows shall be current, explicit, unbiased, and reflect all the information available to the entity without undue cost and effort about the amount, timing and uncertainty of those future cash flows. They should reflect the entity’s perspective, provided that the estimates of relevant market variables are consistent with observable market prices. [IFRS 17:33]
The discount rates applied to the estimate of cash flows shall: [IFRS 17:36]
(a) reflect the time value of money (TVM), the characteristics of the cash flows, and the liquidity characteristics of the insurance contracts; (b) be consistent with observable current market prices (if any) of those financial instruments whose cash flow characteristics are consistent with those of the insurance contracts; and (c) exclude the effect of factors that influence such observable market prices but do not affect the future cash flows of the insurance contracts.
Risk adjustment for non-financial risk
The estimate of the present value of the future cash flows is adjusted to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of future cash flows that arise from non-financial risk.
Contractual service margin
The CSM represents the unearned profit of the group of insurance contracts that the entity will recognise as it provides services in the future. This is measured on the initial recognition of a group of insurance contracts at an amount that, unless the group of contracts is onerous, results in no income or expenses arising from [IFRS 17:38]
(a) the initial recognition of an amount for the FCF;
(b) the derecognition at that date of any asset or liability recognised for insurance acquisition cash flows; and
(c) any cash flows arising from the contracts in the group at that date.
On subsequent measurement, the carrying amount of a group of insurance contracts at the end of each reporting period shall be the sum of
(a) the liability for the remaining coverage comprises:
(i) the FCF related to future services and;
(ii) the CSM of the group at that date;
(b) the liability for incurred claims, comprising the FCF related to past service allocated to the group at that date.
An insurance contract is onerous at initial recognition if the total of the FCF, any previously recognised acquisition cash flows and any cash flows arising from the contract at that date is a net outflow. An entity shall recognise a loss in profit or loss for the net outflow, resulting in the carrying amount of the liability for the group being equal to the FCF and the CSM of the group being zero.
On subsequent measurement, if a group of insurance contracts becomes onerous (or more demanding), that excess shall be recognised in profit or loss. Additionally, the CSM cannot increase, and no revenue can be recognised until the onerous amount previously recognised has been reversed in profit or loss as part of a service expense. [IFRS 17:48-49]
Premium allocation approach
An entity may simplify the measurement of the liability for remaining coverage of a group of insurance contracts using the Premium Allocation Approach (PAA) on the condition that at the inception of the group: [IFRS 17:53]
(a) the entity reasonably expects that this will be a reasonable approximation of the general model, or
(b) the coverage period of each contract in the group is one year or less.
Where, at the inception of the group, an entity expects significant variances in the FCF during the period before a claim is incurred, such contracts are not eligible to apply the PAA. [IFRS 17:54]
Using the PAA, the liability for remaining coverage shall be initially recognised as the premiums, if any, received at initial recognition, minus any insurance acquisition cash flows. Subsequently, the carrying amount of the liability is the carrying amount at the start of the reporting period plus the premiums received in the period, minus insurance acquisition cash flows, plus amortisation of acquisition cash flows, minus the amount recognised as insurance revenue for coverage provided in that period, and minus any investment component paid or transferred to the liability for incurred claims. [IFRS 17:55]
Practical expedients available under the PAA:
If insurance contracts in the group have a significant financing component, the liability for remaining coverage needs to be discounted. However, this is not required if, at initial recognition, the entity expects that the time between providing each part of the coverage and the due date of the related premium is no more than a year.
In applying PAA, an entity may choose to recognise any insurance acquisition cash flows as an expense when it incurs those costs, provided that the coverage period at initial recognition is no more than a year.
The simplifications from the PAA do not apply to measuring the group’s liability for incurred claims measured under the general model. However, there is no need to discount those cash flows if the balance is expected to be paid or received in one year or less from the date the claims are incurred.
Investment contracts with a DPF
An investment contract with a DPF is a financial instrument and does not include a transfer of significant insurance risk. It is within the scope of the standard only if the issuer also issues insurance contracts. The requirements of the standard are modified for such investment contracts. [IFRS 17:71]
Reinsurance contracts held
The requirements of the standard are modified for reinsurance contracts held.
In estimating the present value of future expected cash flows for reinsurance contracts, entities use assumptions consistent with those used for related direct insurance contracts. Additionally, estimates include the risk of reinsurers’ non-performance.
The risk adjustment for non-financial risk is estimated to represent the risk transfer from the holder of the reinsurance contract to the reinsurer.
On initial recognition, the CSM is determined similarly to direct insurance contracts, except that the CSM represents net gain or loss on purchasing reinsurance. On initial recognition, this net gain or loss is deferred, unless the net loss relates to events that occurred before the purchase of a reinsurance contract (in which case it is expensed immediately).
Subsequently, reinsurance contracts held are accounted for similarly to insurance contracts under the general model. Changes in the reinsurer’s risk of non-performance are reflected in profit or loss and do not adjust the CSM.
Modification and derecognition
Modification of an insurance contract
Suppose the terms of an insurance contract are modified. In that case, an entity shall derecognise the original contract and recognise the modified contract as a new contract if there is a substantive modification, based on meeting any of the specified criteria.
The modification is substantive if any of the following conditions are satisfied:
(a) if, had the modified terms been included at the contract’s inception, this would have led to:
(i) exclusion from the Standard’s scope;
(ii) unbundling of different embedded derivatives;
(iii) redefinition of the contract boundary; or
(iv) the reallocation to a different group of contracts; or
(b) if the original contract met the definition of a direct par insurance contract, but the modified contract no longer meets that definition, or vice versa; or (c) the entity originally applied the PAA, but the contract’s modifications made it no longer eligible for it.
An entity shall derecognise an insurance contract when it is extinguished or if any of the conditions of a substantive modification of an insurance contract are met. [IFRS 17:74]
Presentation in the statement of financial position
An entity shall present separately in the statement of financial position the carrying amount of groups of:
(a) insurance contracts issued that are assets;
(b) insurance contracts issued that are liabilities;
(c) reinsurance contracts held that are assets; and
(d) reinsurance contracts held that are liabilities.
Recognition and presentation in the statement(s) of financial performance
An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into: [IFRS 17:80]
(a) an insurance service result, comprising insurance revenue and insurance service expenses; and
(b) insurance finance income or expenses.
The income or expenses from reinsurance contracts shall be presented separately from the expenses or income from insurance contracts.
Insurance service result
In its profit or loss statement, an entity must show how much money it made from the groups of insurance contracts it sold and how much it spent on claims and other insurance service costs related to the groups of insurance contracts it sold. Any investment components must be left out of revenue and insurance service costs. A business can’t include premiums in its profit or loss if that information doesn’t match up with the money it brings in.
Insurance finance income or expenses
Insurance finance income or expenses comprises the change in the carrying amount of the group of insurance contracts arising from: [IFRS 17:87]
(a) the effect of the time value of money and changes in the time value of money; and
(b) the effect of changes in assumptions that relate to financial risk; but
(c) excluding any such changes for groups of insurance contracts with direct participating insurance contracts that would instead adjust the CSM.
An entity has an accounting policy choice between including all of the insurance finance income or expense for the period in profit or loss or disaggregating it between an amount presented in profit or loss and an amount presented in other comprehensive income (“OCI”).
Under the general model, disaggregating means presenting in profit or loss an amount determined by a systematic allocation of the expected total insurance finance income or expenses throughout the group of contracts. On derecognition of the group, amounts remaining in OCI are reclassified to profit or loss.
Under the VFA, disaggregating is only allowed for direct par insurance contracts where the entity owns the underlying items. This is done by showing in profit or loss as insurance finance income or expenses an amount that matches the accounting income or expenses that come from the underlying items. When the groups are no longer recognised, the amounts that were once recognised in OCI stay there.
An entity shall disclose qualitative and quantitative information about: [IFRS 17:93]
(a) the amounts recognised in its financial statements that arise from insurance contracts; (b) the significant judgements and changes in those judgements made when applying IFRS 17; and (c) the nature and extent of the risks that arise from insurance contracts.