5.1 Insurance Contract Accounting (IFRS 17)

Insurance contracts are complex financial instruments that require specialized accounting treatment. IFRS 17 revolutionizes how insurers report these contracts, aiming to boost transparency and comparability across the industry.

The standard introduces three measurement models: the General Measurement Model, Premium Allocation Approach, and Variable Fee Approach. Each model suits different types of insurance contracts, ensuring accurate financial reporting for various insurance products.

Insurance Contracts and Measurement Models

IFRS 17 Overview

Top images from around the web for IFRS 17 Overview

• 

  Corporate Attributes and Corporate Disclosure Level of Listed Companies in Nigeria: A Post-IFRS ... View original

  Is this image relevant?

• 

  A critical analysis of the contents of the IFRS for SMES: a South African perspective View original

  Is this image relevant?

• 

  Journal of Accounting and Taxation - factors influencing international financial reporting ... View original

  Is this image relevant?

• 

  Corporate Attributes and Corporate Disclosure Level of Listed Companies in Nigeria: A Post-IFRS ... View original

  Is this image relevant?

• 

  A critical analysis of the contents of the IFRS for SMES: a South African perspective View original

  Is this image relevant?

1 of 3

Top images from around the web for IFRS 17 Overview

• 

  Corporate Attributes and Corporate Disclosure Level of Listed Companies in Nigeria: A Post-IFRS ... View original

  Is this image relevant?

• 

  A critical analysis of the contents of the IFRS for SMES: a South African perspective View original

  Is this image relevant?

• 

  Journal of Accounting and Taxation - factors influencing international financial reporting ... View original

  Is this image relevant?

• 

  Corporate Attributes and Corporate Disclosure Level of Listed Companies in Nigeria: A Post-IFRS ... View original

  Is this image relevant?

• 

  A critical analysis of the contents of the IFRS for SMES: a South African perspective View original

  Is this image relevant?

1 of 3

• IFRS 17 establishes principles for recognition, measurement, presentation and disclosure of insurance contracts
• Aims to provide relevant information to faithfully represent insurance contracts
• Replaces IFRS 4, which allowed various accounting practices resulting in lack of comparability
• Effective for annual reporting periods beginning on or after January 1, 2023

Defining an Insurance Contract

• Insurance contract transfers significant insurance risk from policyholder to insurer
• Insurer compensates policyholder if a specified uncertain future event adversely affects them
• Excludes contracts that do not transfer significant insurance risk (investment contracts)
• Assessed on a contract-by-contract basis considering all substantive rights and obligations

General Measurement Model (GMM)

• Default model for measuring insurance contracts under IFRS 17
• Applies to all insurance contracts, unless eligibility criteria met for premium allocation approach or variable fee approach
• Measures insurance contracts based on a current fulfillment value using updated assumptions
• Comprises estimates of future cash flows, discounting, risk adjustment, and contractual service margin

Premium Allocation Approach (PAA)

• Simplified approach for measuring liability for remaining coverage
• Permitted for contracts with coverage period of one year or less, or if it approximates general measurement model
• Measures liability for remaining coverage based on premiums received less acquisition costs
• Liability for incurred claims measured using general measurement model

Variable Fee Approach (VFA)

• Modification of general measurement model for direct participating contracts
• Applies to insurance contracts that provide investment-related services and payments to policyholders that vary with underlying items
• Contractual service margin adjusted for changes in variable fee (insurer's share of fair value changes in underlying items)
• Reflects that insurer substantially provides investment-related services to policyholder

Key Components of Insurance Liabilities

Contractual Service Margin (CSM)

• Represents unearned profit insurer expects to recognize as it provides services under insurance contract
• Determined at initial recognition as difference between expected inflows and outflows, including risk adjustment
• Recognized in profit or loss over coverage period based on passage of time or units of coverage provided
• Adjusted for changes in estimates of future cash flows related to future services

Risk Adjustment

• Compensation insurer requires for bearing uncertainty about amount and timing of cash flows that arise from non-financial risk
• Reflects insurer's degree of diversification benefit and risk aversion
• Determined using a confidence level technique (cost of capital approach) or a conditional tail expectation technique
• Recognized in profit or loss as insurer is released from risk over time

Fulfilment Cash Flows

• Estimates of future cash inflows (premiums) and outflows (claims, benefits, expenses) that will arise as insurer fulfills insurance contract
• Includes all cash flows within boundary of each contract in the group
• Incorporates financial risk (effect of discounting) and non-financial risk (risk adjustment)
• Updated at each reporting period to reflect current estimates using consistent, unbiased, probability-weighted assumptions

Specific Contract Types and Transition

Onerous Contracts

• Insurance contract is onerous at initial recognition if fulfilment cash flows, risk adjustment, and contractual service margin result in a net outflow
• Loss component recognized immediately in profit or loss
• Subsequent changes in fulfilment cash flows allocated to loss component until it is eliminated

Reinsurance Contracts Held

• Reinsurance contracts held accounted for separately from underlying insurance contracts
• Gains on purchasing reinsurance recognized in profit or loss immediately (net cost or net gain approach)
• Measurement follows general measurement model, with modifications for non-performance risk and timing of payments

Transition Approaches

• Full retrospective approach (default) applies IFRS 17 retrospectively to each group of insurance contracts
• Modified retrospective approach permits specific modifications if full retrospective approach impracticable
• Fair value approach determines contractual service margin or loss component at transition date as difference between fair value and fulfilment cash flows
• Choice of transition approach applied consistently to each group of insurance contracts