Paul Sanchez
IFRS 17, effective for annual reporting periods from 1 January 2023, sets out principles for the recognition, measurement, presentation, and disclosure of insurance contracts. IFRS 17 defines an insurance contract as a contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder for any adverse effects of a specified uncertain future event (the insured event). IFRS 17 requires entities to use a current measurement model for their insurance liabilities, employing updated information for risks and obligations. This standard replaces IFRS 4, addressing the comparative problems it created by mandating a consistent accounting approach for all insurance contracts.
| Characteristics | Values |
|---|---|
| Effective date | 1 January 2023 |
| 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 |
| Key features | The transfer of insurance risk, which is defined as ‘risk, other than financial risk, transferred from the holder of a contract to the issuer'; The insurance risk transferred must also be significant; Compensation under the contract is linked to the occurrence of the insured event; The policyholder must already be exposed to the insurance risk, with the insured event having an adverse effect on the customer if it occurs |
| Scope | Does not include product warranties, performance bonds, non-specific ‘comfort letters’ or similar financial instruments |
| Optional approach | Simplified measurement approach, or premium allocation approach, for simpler insurance contracts |
| Accounting policy choice | Recognise all insurance finance income or expenses in profit or loss; or recognise some of that income or expenses in other comprehensive income |
| Loss-making contracts | Loss is recognised immediately |
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What You'll Learn
- IFRS 17 defines an insurance contract as a contract where one party accepts significant insurance risk from another
- IFRS 17 sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts
- IFRS 17 requires entities to use a current measurement model for insurance liabilities
- IFRS 17 includes an optional simplified measurement approach for simpler insurance contracts
- IFRS 17 requires entities to make an accounting policy choice regarding the recognition of insurance finance income or expenses
IFRS 17 defines an insurance contract as a contract where one party accepts significant insurance risk from another
IFRS 17, which came into effect for annual reporting periods beginning on or after 1 January 2023, sets out principles for the recognition, measurement, presentation, and disclosure of insurance contracts. It defines an insurance contract as a contract where 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.
The definition of an insurance contract under IFRS 17 has several key features. Firstly, it involves the transfer of insurance risk, which is defined as a risk other than financial risk, from the holder of a contract to the issuer. Secondly, the insurance risk transferred must be significant. This significance is assessed from the perspective of the issuer, considering the time value of money and whether the contract exposes the issuer to both financial risk and significant insurance risk. Thirdly, compensation under the contract is linked to the occurrence of the insured event. Finally, the policyholder must already be exposed to the insurance risk, and the insured event must have an adverse effect on the policyholder if it occurs.
Non-insurance entities need to establish the existence and extent of any insurance risk transfer to correctly account for the contract under the appropriate IFRS. For example, credit card contracts or similar arrangements that provide credit or payment options meet the definition of an insurance contract only if the company does not reflect an assessment of the insurance risk associated with an individual customer when setting the contract price. Similarly, fixed-fee service contracts that meet the definition of an insurance contract may be accounted for under IFRS 15 if specific conditions are met, including that the contract compensates the customer through services rather than cash payments and that the insurance risk transferred arises primarily from the customer's use of services rather than uncertainty over those services.
IFRS 17 also includes an optional simplified measurement approach, known as the premium allocation approach, for simpler insurance contracts. This approach assists entities in implementing the standard without disrupting its overall usefulness.
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IFRS 17 sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts
IFRS 17 sets out principles for the recognition, measurement, presentation, and disclosure of insurance contracts. It replaces IFRS 4, which was an interim standard issued in 2004. The new standard is effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted as long as IFRS 9 is also applied.
IFRS 17 combines the current measurement of future cash flows with the recognition of profit over the period that services are provided under the contract. It requires entities to make an accounting policy choice: they can choose to recognize all insurance finance income or expenses in profit or loss, or they can recognize some of that income or expenses in other comprehensive income. This allows for useful information to be provided about insurance contracts, which combine features of both a financial instrument and a service contract.
The standard also requires the separate presentation of insurance service results (including insurance revenue) and insurance finance income or expenses. This separate presentation excludes any investment components. In the case of loss-making contracts, entities must recognize the loss immediately.
IFRS 17 includes an optional simplified measurement approach, known as the premium allocation approach, for simpler insurance contracts. It assists entities in implementing the standard without disrupting implementation or diminishing the usefulness of the information provided.
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IFRS 17 requires entities to use a current measurement model for insurance liabilities
IFRS 17, which sets out principles for the recognition, measurement, presentation, and disclosure of insurance contracts, requires entities to use a current measurement model for their insurance liabilities. This means that entities must use updated information for risks and obligations when measuring their insurance liabilities. The current measurement model incorporates the current measurement of future cash flows rather than a fair value model. This is because insurance contracts are typically fulfilled over time by the issuer, rather than transferred to third parties.
The current measurement model includes the estimated future cash inflows and outflows that relate directly to the fulfilment of the portfolio of contracts. This includes cash flows related to any onerous contract liabilities. When a portfolio of insurance contracts is onerous on initial recognition, it is measured as a liability, and a corresponding loss is immediately recognised in profit or loss. The current measurement model also includes the fulfilment cash flows, which are the current estimates of the amounts the insurer expects to collect from premiums and pay out for claims, benefits, and expenses, including adjustments for timing and financial risks.
IFRS 17 includes multiple measurement models, and the appropriate one depends on how a contract is classified. For instance, the Premium Allocation Approach is applied to short-term contracts, while the Variable Fee Approach is applied to insurance contracts with direct participation features. The General Model, which is comprised of the "building blocks" identified in paragraph 32 of IFRS 17, is used for all insurance contracts that fall within the scope of IFRS 17 unless they meet the requirements to be measured using the Premium Allocation Approach or the Variable Fee Approach.
The current measurement model under IFRS 17 is a significant improvement over the requirements of IFRS 4, which allowed non-insurance entities to apply their existing accounting policies to insurance contracts. IFRS 17 solves the comparative problems created by IFRS 4 by requiring all insurance contracts to be accounted for consistently.
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IFRS 17 includes an optional simplified measurement approach for simpler insurance contracts
IFRS 17 is a comprehensive new accounting model for insurance contracts, replacing the 2004 'temporary' standard (IFRS 4). It introduces fundamental changes to how insurance contracts are measured and accounted for. The new standard applies to insurance or reinsurance contracts issued and reinsurance contracts held, even within non-insurance companies. IFRS 17 brings greater transparency about the profitability of insurance contracts and provides insights into an insurer's financial health.
IFRS 17 includes an optional simplified measurement approach, called the premium allocation approach (PAA), for simpler insurance contracts. This approach is intended for contracts that meet specific criteria. The general measurement model, on the other hand, is applicable to all groups of insurance contracts within the scope of IFRS 17. This model is based on a risk-adjusted present value of future cash flows that will arise as the insurance contract is fulfilled. It aims to provide relevant information about these future cash flows.
The IFRS 17 model requires companies to remeasure their estimates each reporting period using current assumptions, which can be a significant undertaking and may necessitate new processes and controls. The aggregation of contracts into 'groups' is required at initial recognition and is not reassessed subsequently. This grouping of contracts is performed to limit the offsetting of profitable contracts against loss-making ones and typically results in a grouping structure below the portfolio of insurance contracts level.
The simplified measurement approach, or premium allocation approach, is designed to provide a more straightforward method for measuring certain insurance contracts. It is important to note that IFRS 17 also includes mandatory modifications for the measurement of reinsurance contracts held, direct participating contracts, and investment contracts with discretionary participation features. These modifications ensure that the measurement approach aligns with the specific characteristics of these contract types.
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IFRS 17 requires entities to make an accounting policy choice regarding the recognition of insurance finance income or expenses
IFRS 17 Insurance Contracts sets out principles for the recognition, measurement, presentation, and disclosure of insurance contracts within its scope. It replaces IFRS 4, which was an interim standard that allowed entities to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations.
Insurance contracts have features of both financial instruments and service contracts. They often generate cash flows with substantial variability over long periods. To provide useful information about these features, IFRS 17 combines the current measurement of future cash flows with the recognition of profit over the period that services are provided under the contract. This helps to present insurance service results separately from insurance finance income or expenses.
The standard also includes an optional simplified measurement approach, or premium allocation approach, for simpler insurance contracts. This approach may be useful for entities that are implementing the standard, as it provides flexibility in how they recognise and measure insurance contracts. The Board that issued IFRS 17 has also provided amendments to assist entities in implementing the standard without disrupting their operations or diminishing the usefulness of the information provided.
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Frequently asked questions
IFRS 17 is a set of principles for the recognition, measurement, presentation, and disclosure of insurance contracts. It replaces IFRS 4 and came into effect on January 1, 2023.
An insurance contract under IFRS 17 is defined as "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."
IFRS 17 defines "insurance risk" as "risk, other than financial risk, transferred from the holder of a contract to the issuer." For a contract to be considered an insurance contract, it must involve the transfer of significant insurance risk.
