The IFRS 17 general measurement model

What are the building blocks of the general measurement model?

1. Estimates of future cash flows: premiums, claims, benefits and expenses within the contract boundary, as unbiased probability-weighted estimates.
2. Discounting: to reflect the time value of money and financial risks, using current rates consistent with observable market prices.
3. Risk adjustment for non-financial risk: the compensation the insurer requires for bearing uncertainty about those cash flows.
4. Contractual service margin: the unearned profit, set at initial recognition so that no gain arises.

The first three together are the fulfilment cash flows. Fulfilment cash flows plus the CSM make the liability for remaining coverage; claims already incurred but not yet paid form the liability for incurred claims.

IFRS 17 general measurement model: a worked example

An insurer issues a group of three-year contracts for a single premium of 900, received at the start. It expects claims of 200 at the end of each year. The discount rate is 5%, the risk adjustment is 30, released evenly, and cover is provided evenly over the three years.

Each year, the CSM accretes interest at the rate locked in at initial recognition, then a share is released based on the coverage provided: a third in year 1, half of what remains in year 2, and the rest in year 3.

Over the three years, total profit is 300, exactly premiums of 900 less claims of 600. Insurance revenue in each year is the expected claims of 200, plus the risk adjustment released, plus the CSM released. The finance expense is the unwinding of the discount on the claims and the accretion of the CSM; in practice it is matched by investment income on the 900 the insurer holds, which is why insurers present both in an insurance and investment result.

Why is insurance revenue not the premium?

Insurance revenue reflects the service provided in the period: the expected claims and expenses for that period, the release of risk, and the CSM earned. Total revenue over the contract's life equals the premiums, adjusted for financing effects and excluding investment components. Recognising the whole 900 when it is received, as a cash-basis insurer might, would bear no relation to when the cover was given.

What happens when estimates change?

Changes relating to future service, such as higher expected claims in later years, adjust the CSM, so the effect is spread over the remaining cover. Changes relating to current or past service, such as claims in the year being higher than expected, go straight to profit or loss. Changes in discount rates go to insurance finance income or expense. If adverse changes exceed the CSM, the group becomes onerous. See the contractual service margin and onerous groups.

Which cash flows are included?

Only those within the contract boundary: cash flows from rights and obligations that exist during the period in which the insurer can compel the policyholder to pay premiums or has a substantive obligation to provide cover. Premiums for a renewal the insurer can reprice to reflect the reassessed risk fall outside the boundary. Directly attributable expenses, such as claims handling and policy administration, are included; general overheads are not.

How are discount rates set?

Either bottom-up, a liquid risk-free curve plus an illiquidity premium reflecting the liabilities, or top-down, the yield on a reference portfolio of assets less adjustments for risks not relevant to the liabilities. The CSM is accreted at the rate locked in when the group was recognised, so differences between current and locked-in rates sit in insurance finance income or expense.

Where to go next

See the risk adjustment, the premium allocation approach and insurance accounting under IFRS 17.

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