IFRS 17 insurance contracts: an overview

What does IFRS 17 cover?

Insurance contracts a company issues, reinsurance contracts it holds, and investment contracts with discretionary participation features if it also issues insurance contracts. An insurance contract is one under which the issuer accepts significant insurance risk by agreeing to compensate the policyholder if an uncertain future event adversely affects them. Product warranties given by a manufacturer, dealer or retailer and their residual value guarantees are excluded; most financial guarantees fall under IFRS 9 unless the issuer has previously treated them as insurance; and fixed-fee service contracts, and loans whose only insurance is a waiver of the balance on death, can be accounted for under other standards by choice. See insurance accounting: IFRS 17 in practice.

How are insurance contracts grouped?

Contracts are first sorted into portfolios: contracts subject to similar risks and managed together. Each portfolio is then divided at initial recognition into at least three groups: contracts that are onerous, contracts with no significant possibility of becoming onerous, and the rest. Contracts issued more than one year apart cannot sit in the same group, so groups are annual cohorts, and once set they are not reassessed. The cohort rule bites hardest for life business in which generations of policyholders share returns, which is why the European Union lets insurers exempt some of those contracts (see below). See onerous groups under IFRS 17.

What are the IFRS 17 building blocks?

Each group is measured at its fulfilment cash flows, the probability-weighted estimates of future cash flows adjusted for the time value of money and financial risk plus a risk adjustment for non-financial risk, together with the contractual service margin, the profit the insurer expects to earn as it provides cover. The CSM cannot be negative: if the fulfilment cash flows are a net outflow, the group is onerous and the loss goes to profit or loss at once. After initial recognition the liability is split into the liability for remaining coverage and the liability for incurred claims. See the IFRS 17 risk adjustment and the contractual service margin.

IFRS 17 in practice: measuring two groups on day one

An insurer issues a group of 3-year contracts for a single premium of CU 1,200, received at the start. It expects claims and expenses of CU 320 a year, paid at each year end, discounts them at 3% and sets a risk adjustment of CU 55. A second group has the same premium but expected claims and expenses of CU 420 a year. All figures are in CU.

The profitable group shows no gain on day one: the CSM of 239.8 is released over the 3 years as cover is provided, alongside the release of the risk adjustment, so profit follows the service. The onerous group's loss of 43.0 is recognised immediately and tracked as a loss component, so later claims within it are not counted twice. See the general measurement model, which follows a group through to the end of its cover.

Which measurement model applies?

• General measurement model: the default, using the building blocks above. The CSM accretes interest at the rate locked in at initial recognition and absorbs changes in estimates that relate to future service.
• Premium allocation approach: a simplification allowed when the coverage period is one year or less, or when it gives a result close to the general model. The liability for remaining coverage is broadly premiums received less revenue recognised, much like an unearned premium reserve. See the premium allocation approach.
• Variable fee approach: required for direct participating contracts, where policyholders share in a clearly identified pool of underlying items, such as many with-profits and unit-linked contracts. The insurer's share of changes in the underlying items adjusts the CSM. See the variable fee approach.

Reinsurance contracts held are measured separately from the contracts they cover, with their own CSM. See reinsurance held.

How are insurance results presented?

Insurance revenue reflects the cover and other services provided in the period and excludes investment components, the amounts repaid to policyholders whatever happens. Insurance service expenses include incurred claims, losses on onerous groups and the amortisation of insurance acquisition cash flows, and the difference is the insurance service result. Insurance finance income and expenses, the effect of the time value of money and financial risk, are shown separately, with an option to take part of them to other comprehensive income. The investments backing the contracts are measured under IFRS 9. See insurers' investments under IFRS 9 and IFRS 17 disclosures.

What is changing for IFRS 17?

The IASB plans to decide in the second half of 2026 when to start its post-implementation review of IFRS 17. In the European Union, insurers may exempt intergenerationally-mutualised and cash flow matched contracts from the annual cohort requirement. The European Commission must review that exemption by 31 December 2027, and in September 2026 EFRAG asked it to wait until the IASB's review is complete. From 2027 insurers also apply IFRS 18 to their income statements. See IFRS 18 explained.

How does IFRS 17 compare with US GAAP?

US GAAP has no single equivalent and no CSM. Insurers apply ASC 944, as amended by the long-duration targeted improvements (ASU 2018-12), effective from 2023 for most SEC filers and 2025 for other entities: assumptions for traditional long-duration contracts are reviewed at least annually, the discount rate is an upper-medium grade fixed-income yield updated at each reporting date, and market risk benefits are measured at fair value. Short-duration contracts follow an unearned premium approach close to the premium allocation approach. See IFRS vs US GAAP key differences.

This guide is general information. It is not tax or legal advice for your situation.