In May 2017, after almost 20 years of development, the International Accounting Standards Board published IFRS 17 "Insurance Contracts". IFRS 17 completely replaces the current IFRS 4 (published in March 2004) and the full application of the new standard becomes effective for annual periods beginning on or after January 1, 2023.

IFRS 4 was actually designed as a kind of a temporary standard that would allow insurance companies to continue applying accounting policies that were developed according to their previous local accounting standards. In practice, this meant that companies used many different approaches to accounting for insurance contracts, which made it very difficult to compare the financial statements and results of similar entities. IFRS 17 effectively addresses the comparability problems created by IFRS 4: it requires all insurance contracts to be accounted for in a consistent and transparent manner, which is a great benefit to both investors and insurance companies.

The most important changes in IFRS 17 relate to the methodology used for valuing insurance and reinsurance contracts and to the disclosures in the notes related to insurance, reinsurance and discretionary investment contracts. For the valuation of insurance contracts in the annual financial statements of insurance and reinsurance companies, IFRS 17 provides companies with three models: General Measurement Model (GMM), Premium Allocation Approach (PAA) and Variable Fee Approach (VFA).

IFRS 17 further offers the right of choice regarding the accounting of the interest effect from discounting. The goal when deciding on the use of the option is to compensate for fluctuations in the present value from the valuation of financial instruments as much as possible with the discounting of future cash flows according to IFRS 17 and to reduce the volatility of the results in this way.

Scope and subject of the standard

IFRS 17 applies to all insurance contracts issued by the entity (including reinsurance contracts), reinsurance contracts held by the entity and investment contracts with profit sharing based on a discretionary decision.

In accordance with the provisions of IFRS 17, an insurance contract is a contract based on which one party (the issuer) assumes a significant insurance risk from another party (the policyholder) and agrees to pay the policyholder compensation in the event that the policyholder suffers damage due to an uncertain future event (the insured event). This definition is similar to that in IFRS 4 and has not changed substantially.

The subject of the new standard for insurance contracts published on May 18, 2017, which comes into force for annual periods beginning on or after January 1, 2023, is the presentation of assets and liabilities arising from insurance contracts in financial statements prepared in accordance with IFRS.

Measurement

On initial recognition, an entity shall measure a group of insurance contracts at the total of:

1. The fulfilment cash flows, which comprise:
   • Estimates of future cash flows,;
   • An adjustment to reflect the time value of money and the financial risks related to the future cash flows, to the extent that the financial risks are not included in the estimates of the future cash flows; and
   • A risk adjustment for non-financial risk;
2. The contractual service margin (margin for contracted service is a component of assets or liabilities for a group of insurance contracts that represents unearned profit that the entity will recognize when it provides services from the insurance contract in the future). 

Presentation in financial statements

In accordance with the provisions of IFRS 17, in the report on the financial position, the entity should separately present the book value of the portfolio:

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.

The amounts recognized in the statement of profit and loss and the statement of comprehensive income disaggregate by the entity into:

1. Insurance service result, comprising insurance revenue and insurance service expenses; and
2. Insurance finance income or expenses.

An entity shall present income or expenses from reinsurance contracts held separately from the expenses or income from insurance contracts issued. 

Insurance revenue and insurance service expenses presented in profit or loss shall exclude any investment components.

Measurement of income from insurance contracts 

Revenue recognition is an area in which the IFRS 17 principles constitutes a significant change compared to the various previously applied local standards, including IFRS 4. Previously, revenue was often recorded and reported, for example, according to the premium charged (life insurance).

According to IFRS 17, revenue constitutes the total change in the liability for remaining coverage, relating to coverage and services during the period for which the entity expects to receive a compensation.

Onerous contracts

In accordance with the provisions of IFRS 17, an insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract, any previously recognized insurance acquisition cash flows and any cash flows arising from the contract at the date of initial recognition in total are a net outflow.

In accordance with the requirements of the standard, an entity should group such contracts separately from contracts that are not onerous. An entity may identify the group of onerous contracts by measuring a set of contracts rather than individual contracts. An entity should recognize a loss in profit or loss for the net outflow for the group of onerous contracts, resulting in the carrying amount of the liability for the group being equal to the fulfilment cash flows and the contractual service margin of the group being zero.

Dana source: Grant Thornton International, IFRS 17 Insurance contracts