IFRS 17 Insurance Liabilities

Overview

This lecture explains the IFRS 17 standard for valuing insurer liabilities, outlining key measurement models and practical steps for profit and loss recognition in insurance contracts.

IFRS 17 Valuation Process

• IFRS 17 focuses on valuing insurer liabilities considering long-term nature and uncertainties in insurance.
• Step 1: Estimate expected premiums, payments, and related expenses (future cash flows).
• Step 2: Discount future cash flows to present value reflecting time value of money.
• Step 3: Add a risk adjustment for uncertainty in amount and timing of future cash flows.
• Step 4: Profits at inception are included in the contractual service margin (CSM) for future service.

Measurement Models under IFRS 17

• The General Measurement Model (GMM) or Building Block Approach (BBA) is the default method.
• The BBA applies to basic insurance where payments depend on insured events (e.g., property, casualty, non-participating life).
• Profits and risk margins from the CSM are released over time, reflecting changes in estimates in the remaining CSM.

Premium Allocation Approach (PAA)

• Used for short-term insurance with sufficient premium margins.
• Profits and unearned premiums are released over the coverage period; gains/losses shown in profit and loss.
• Optional shortcut, but results must match the full BBA.
• For expected loss-making contracts, an explicit loss component is added.

Variable Fee Approach (VFA)

• Applied to long-term, participating contracts where policyholders share in investment or technical results (e.g., unit-linked or variable annuities).
• Profit recognition includes changes in policyholder profit participation and revaluation of the CSM.

Contract Recognition and Derecognition

• A contract is recognized at the earliest of coverage start, first payment due, or evidence of being loss-making.
• A contract is derecognized if canceled, expired, obligation met, or substantially modified.

Grouping and Cohorting of Contracts

• Insurance contracts are grouped into portfolios with similar risks (e.g., car insurance).
• Portfolios are split into at least three groups: onerous, no significant risk of being onerous, and others.
• Each group is divided into annual cohorts (issued within one year) for transparency and accurate profit recognition.

Key Terms & Definitions

• IFRS 17 — International standard for insurance contract accounting.
• Contractual Service Margin (CSM) — The expected profit from unearned future service in the contract.
• General Measurement Model (GMM) / Building Block Approach (BBA) — Default method for measuring insurance liabilities under IFRS 17.
• Risk Adjustment — An allowance for uncertainty in future cash flows.
• Premium Allocation Approach (PAA) — Simplified measurement for short-term contracts.
• Variable Fee Approach (VFA) — Measurement for participating contracts sharing investment results.
• Onerous Contract — A contract expected to be loss-making.
• Cohort — Group of contracts issued within the same year.

Action Items / Next Steps

• Review IFRS 17 requirements and differences between GMM/BBA, PAA, and VFA.
• Practice grouping example insurance contracts into portfolios, groups, and cohorts.
• Read further on recognition and derecognition criteria in IFRS 17.