Onerous groups of insurance contracts

IFRS 17 does not let insurers hide loss-making business inside profitable portfolios: onerous contracts are grouped separately and their losses are recognised at once. The mechanics afterwards, the loss component and its systematic allocation, are some of the least intuitive in the standard. This guide works through an onerous group from day one, and covers groups that become onerous later and the PAA test.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. 3 minute read.

Short answer

Onerous contracts under IFRS 17 are groups of insurance contracts whose fulfilment cash flows, the present value of expected outflows plus the risk adjustment, exceed the expected inflows. The excess is recognised as a loss immediately, and tracked as a loss component of the liability for remaining coverage. As claims are incurred, part of each period's expected costs is allocated to the loss component, so it is excluded from insurance revenue and reduces insurance service expenses. In this guide's example, a group with a day-one loss of 80 allocates 7.41% of each period's expected claims and risk release to the loss component.

At a glance

Onerous when
Outflows plus RA exceed inflows
Loss
Recognised immediately
Tracked as
Loss component of the liability
Allocation
Systematic share of later costs
Effect
Excluded from revenue
Reversal
Favourable changes reduce it first
Onerous groups of insurance contractsOnerous when: Outflows plus RA exceed inflows; Loss: Recognised immediately; Tracked as: Loss component of the liability; Allocation: Systematic share of later costs; Effect: Excluded from revenue; Reversal: Favourable changes reduce it first.KEY FACTS AT A GLANCEOnerous groups of insurance contractsOnerous whenOutflows plus RA exceedinflowsLossRecognised immediatelyTracked asLoss component of theliabilityAllocationSystematic share of latercostsEffectExcluded from revenueReversalFavourable changes reduceit firstTax BakersOnerous groups of insurance contractsOnerous when: Outflows plus RA exceed inflows; Loss: Recognised immediately; Tracked as: Loss component of the liability; Allocation: Systematic share of later costs; Effect: Excluded from revenue; Reversal: Favourable changes reduce it first.KEY FACTS AT A GLANCEOnerous groups of insurancecontractsOnerous whenOutflows plus RA exceed inflowsLossRecognised immediatelyTracked asLoss component of the liabilityAllocationSystematic share of later costsEffectExcluded from revenueReversalFavourable changes reduce it firstTax Bakers
Key facts at a glance, as set out in this guide.

Onerous contracts under IFRS 17: a worked example

An insurer issues a group of contracts priced to win market share. The present value of expected premiums is 1,000, of expected claims and expenses 1,050, and the risk adjustment 30.

Day-one loss on the onerous groupDay-one loss on the onerous group1,080Outflowsplus RA-1,000Inflows80Lossrecognised
No CSM: the shortfall is expensed at once.
At initial recognitionAmount
Present value of outflows plus risk adjustment1,080
Present value of inflows(1,000)
Loss recognised immediately80
Contractual service marginNil
Loss component, as a share of outflows plus RA: 80 / 1,0807.41%

How is the loss component used up?

Each period, the expected claims, expenses and risk adjustment released are allocated between the loss component and the rest of the liability, on a systematic basis. Using the ratio at initial recognition, in year 1, when claims of 350 are incurred as expected and the risk adjustment releases 10:

Year 1Amount
Expected claims and RA release: 350 + 10360
Allocated to the loss component: 7.41% x 36026.67
Insurance revenue: 360 - 26.67333.33
Insurance service expenses: claims 350 less reversal of loss 26.67(323.33)
Insurance service result10.00

The loss was recognised on day one, so the year's result is just the release of risk. Over the group's life, the total result is the loss of 80 plus the risk adjustment of 30 released: -50, which is exactly inflows of 1,000 less outflows of 1,050. The allocation keeps revenue from including amounts that were already expensed as part of the day-one loss.

What if a group becomes onerous later?

A profitable group becomes onerous when unfavourable changes in estimates relating to future service exceed its remaining CSM. The CSM is reduced to nil and the excess is recognised as a loss, creating a loss component. If estimates later improve, favourable changes first reduce the loss component, with the reversal in profit or loss, and only once it is nil is a CSM re-established.

How is the loss component disclosed?

IFRS 17 requires a reconciliation of the opening and closing balances of the liability for remaining coverage excluding the loss component, the loss component itself, and the liability for incurred claims. Readers can see how much loss was recognised in the year, how much was reversed, and how much remains to be used up.

Why are onerous contracts grouped separately?

Within each portfolio and annual cohort, contracts onerous at initial recognition must form their own group, separate from contracts with no significant possibility of becoming onerous and from the rest. Insurers often assess this using sets of contracts with similar characteristics, for example by pricing basis, rather than contract by contract.

How does the onerous test work under the PAA?

Under the premium allocation approach, contracts are assumed not to be onerous unless facts and circumstances indicate otherwise, such as pricing below expected claims or a rise in claims inflation. If they do, the insurer compares the fulfilment cash flows for the remaining cover with the liability for remaining coverage, and recognises the excess as a loss. See the premium allocation approach.

How does this differ from IAS 37 onerous contracts?

IAS 37 does not apply to insurance contracts within IFRS 17. Its onerous contract test compares unavoidable costs with economic benefits for ordinary contracts; IFRS 17 uses fulfilment cash flows including a risk adjustment, and keeps tracking the loss through the loss component. See IAS 37 onerous contracts, reinsurance held, which can offset onerous losses, and insurance accounting under IFRS 17.

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Questions people ask

When is a group of insurance contracts onerous under IFRS 17?

When the present value of expected outflows plus the risk adjustment exceeds the expected inflows, at initial recognition or later.

What is the loss component?

The part of the liability for remaining coverage that tracks the loss recognised on an onerous group, used up as the related costs are incurred.

Why is part of the expected claims excluded from insurance revenue?

Because the amount allocated to the loss component was already recognised as part of the day-one loss.

Can an onerous group become profitable again?

Yes. Favourable changes first reverse the loss component, and then a CSM is re-established.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 17 Insurance Contracts

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

InsuranceThe contractual service marginInsuranceThe premium allocation approachInsuranceInsurance accounting: IFRS 17 in practice

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