[Music] hi Welcome to our video on the IFRS 17 standard this video will explain how IFRS 17 focuses on the valuation of an insurer's liabilities the standard takes into account the long-term nature of the insurance business as well as uncertainties regarding timing and amounts the valuation is similar to the approach introduced by the solvency 2 Reg ulations let's take a look at the steps involved in determining the fair value of an insurer's obligations step one we need to estimate the premiums to be received and the payments and expenses related to the contracts essentially the cash flows step two we then discount these predicted cash flows to allow for the time value in line with the characteristics of the cash flows step three we add a risk adjustment to allow for the uncertainty about the amount and timing of future cash flows for a profitable contract this valuation would result in an immediate gain at the Inception of the contract however ifrs17 recognizes that the insurer still needs to service the contract over the entire coverage period that is why as step four the calculated profit margin at Inception is placed under the contractual service margin or CSM which represents the profit that an insurer is expecting in the future when it provides the service this approach is referred to as the general measurement model GMM or the building block approach BBA according to IFRS 17 the revaluation of liabilities and profit recognition over time must be adjusted to reflect the nature of the different lines of the insurance business the building block approach can be applied for the basic insurance business where the payment to the policyholder depends only on the occurrence of an insured event as this is the case for a majority of Property and Casualty and life health non-participating risk businesses this approach is well suited for their revaluation in this case the contractual service margin and the risk margin are released over time changes in estimates on future cash flows are reflected in the remaining contractual service margin while observed deviations from the expectations are shown directly in profit and loss profitable short-term risk business with sufficient pricing margins in the premiums does not require a sophisticated method to estimate Future Insurance events and premiums to determine an adequate earnings and release pattern for the unearned premium and profit Reserve instead the premium can be released during the short period in which the occurred damage must be covered the resulting gain or loss is shown in the profit and loss statement where claims are not settled immediately a claims Reserve is estimated and booked in line with the measurement principles this approach is called the premium allocation approach the use of this shortcut is optional however the result under the approach must be the same as the result achieved when the full building block approach is applied if the short-term business is expected to be loss making an explicit loss component has to be booked in addition to the premium reserve for long-term life business with participating features where the client participates in the insurer's investment result or the technical result The Profit recognition has to be adjusted this adjustment accounts for the fact that the present value of future cash flows depends not not just on the occurrence of the insured event but also on the underlying items this applies in particular to unit linked contracts variable annuities and life insurance business with contractual profit participation in these cases the revaluation of the policyholder cash flows also includes revaluation due to changes in the expectations for future profit participation adjustments to the CSM reflect the revaluation of the entity's share of the profits from underlying items this is called the variable fee approach vfa for short the name refers to the fact that the service margin essentially represents the fee income that a company earns after considering the policyholders cash flows the ifrs17 standard also defines rules on when an insurance contract can be recognized in an insurer's books it is the earliest of the beginning of the coverage period or the due date of the first payment or when clear signs emerge that a contract has become loss making similarly there are guidelines for D recognizing contracts a contract is derecognized when it is cancelled or it has expired or the obligation has been met or the contract was modified in such a way that it has to be recorded as a new contract last but not least ifrs17 also provides guidelines on grouping insurance contracts to accurately reflect the nature of an insurer's portfolios let's take a look at how this is done step one portfolios of insurance contracts are identified and policies that have similar risks are grouped and managed together for example car insurance step two a portfolio is divided into a minimum of three groups owner as contracts contracts with no major risk of becoming onerous and the remaining contracts step three each group is then further divided into subgroups of contracts that have been issued not more than a year apart they are called annual cohorts for example all profitable car insurance policies sold in 2021 this provides transparency on the trends in an insurer's profits over time by preventing onerous insurance contracts from being offset against profitable ones and ensuring that the performance of insurance contracts is fully recognized in the profit or loss statement over their coverage period we hope this video gave you Clarity on IFRS 17 [Music]