IFRS 17 - Insurance Contract: What has really Changed?

Background

The International Accounting Standards Board (IASB) issued IFRS 17 Insurance Contract in May 2017 as a replacement for IFRS 4 Insurance Contract. The standard was issued to correct the frailties in IFRS 4 and to provide a comprehensive framework for the recognition, measurement, presentation and disclosure of insurance contracts. The objective of IFRS 17 is to ensure that entities provide relevant information that faithfully represents their insurance contracts.

Before now, IFRS 4, being an interim standard, allowed insurers to still adopt accounting practices developed from local GAAPs in accounting for insurance contracts. This made comparability of financial statement across industries and countries impossible. Also, IFRS 4 did not ensure adequate information is provided to aid decision making of investors and other users.

In light of these failings of IFRS 4, the IASB completed its phase II project and issued IFRS 17 in May 2017. IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023.

Overview

IFRS 17 requires a more robust presentation of information on insurance contract to enable users of such information make better decisions. It ensures consistent accounting for all insurance contracts and increases transparency in financial information reported by insurance companies. The standard still retains the definition of insurance contract as given initially by IFRS 4. This means that an insurance contract must involve a transfer of significant insurance risk.

The major changes introduced by IFRS 17 can be summarized under two broad headings; Insurance obligations and Insurance performance.

1. Insurance obligations and assets

The standard requires that groups of insurance contracts be measured and reported using the general measurement model (the building block model). This requires that groups of insurance contracts are measured and reported as the sum of (i) the fulfilment cash flows and (ii) the contractual service margin. 

·       The fulfilment cash flows represent the current estimates of the amounts that an insurer expects to collect as premiums and pay out for claims, benefits and expenses adjusted for the time value of money and uncertainties attached to those cash flows.

·       The contractual service margin: This represents profit the insurers would make from providing the insurance service. This is recognized in the profit/loss over the periods the insurer is providing the coverage.

The standard requires that the estimates and assumptions be reviewed and updated at every period end. This will ensure that insurance rights and obligations are measured using updated information. Insurers can also use other measurement models such as the premium allocation model (for short term insurance contract with coverage of one year or less) and variable fee approach (which is an adaption of the general measurement model used for contracts with direct participation feature).