IFRS 17 Insurance Contract (International Financial Reporting Standards) is the new accounting standards for insurance contracts. IFRS 17 was introduced on May 2017 by International Accounting Standards Board (IASB) and it is a profound development on setting out a common global accounting standard on measurement, recognition of profit and loss, presentation and disclosure of insurance contracts.
IFRS 17 is essentially replacing the Interim Standard (IFRS 4) which allowed insurance companies to employ various accounting practices based on their jurisdiction and their company's policy (GAAP – Generally Accepted Accounting Principles). IFRS 17 was originally scheduled to be applied on or after 1st January 2021, however, the IASB has deferred the implementation date to 1st January 2022.
Overview and Objectives
The new Standard requires insurance companies to identify and group contracts with similar risks into same portfolio of contracts of the same year i.e. whole life insurance contracts of 2017 as a group, vehicle insurance contracts of 2017 as another group. Each portfolio will then be divided into a minimum of three groups based on the expected profitability:
- Contracts that are onerous at initial recognition;
- Contracts that less likely to become onerous subsequently; and
- All other remaining contracts in the group.
However, firms are not allowed to group contracts that are issued more than one year apart together. They may put contracts in the same group under the condition that grouping them in different groups will result in limiting the insurer's ability to set a different price or level of benefits for different types of policyholders. Overall, the IFRS 17 aims to provide investors with more transparent and comparable information. Users can better understand the insurer's financial position, performance and risk exposure while insurance companies on the other hand can benefit from the globally standardised accounting standard (for example, reducing long-term compliance costs, especially for multinational insurers).
Main measurement approaches
IFRS 17 oblige insurance companies to reflect in their balance sheet the fulfilment cash flows and the contractual service margin. The amounts reported in the balance sheets must be updated at the date of report so as to reflect current discount rates, and estimates of the account, the timing of cash flows and the uncertainty relating to insurance contracts. Furthermore, the IFRS 17 provide for extensive disclosure obligations on the insurance companies enabling the better understanding of the amounts estimated. Specifically, the IFRS 17 provide for the following methods of measurement:
- The General Model (GM): This model measures contracts using fulfilment cash flows (FCF) by using the present value of the amounts that insurers expect to collect from premiums and pay out for claims, benefits and expenses, adjusting for risk and timing, plus the estimated profit for providing the contract (contractual service margin CSM). At the end of each accounting period, the total amount of the group of insurance contracts equals the liability for remaining coverage (FCF related to future services & CSM) plus the liability for incurred claims (FCF for past services).
- Premium Allocation Approach (PAA): This is a simplified measure for contracts in the group that have one year or less coverage period, or if the entity expects that it is a reasonable approximation of the general model.
How this impacts you?
In the context of insurers, IFRS 17 may impact the insurer's financial performances, change in profit emergence pattern, change in the presentation of balance sheet and income statement which could affect dividends, tax and remuneration. It will also have operational impacts on data, systems and processes. IFRS 17 adds complexity and costs on compliance and staffs need to be trained to cope with the new standard. However, the new standard will speed up the recognition of onerous contracts and losses and provide better risk management.
In the context of policyholders and investors, the IFRS 17 will help to create higher level of transparency. Thus, providing better insights for easier comparison of firms and improve investors' confidence. Also, liabilities will be valued at market value and there will be a truer reflection of profits.
All in all, the IFRS 17 will be one of the most disruptive changes to the insurance industry. However, the European Insurance and Occupational Pensions Authority (EIOPA) concludes that significant efficiency gains are expected.