The risk adjustment for non-financial risk

The risk adjustment is the one part of the IFRS 17 liability that depends entirely on the insurer's own view of risk. It affects profit on day one, through the CSM, and every year after as it is released. This guide explains what it covers, works through the two main techniques, and covers the confidence level disclosure and the presentation options.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

The IFRS 17 risk adjustment for non-financial risk is the compensation an insurer requires for bearing the uncertainty about the amount and timing of cash flows that arises from non-financial risk, such as insurance and expense risk. It is part of the fulfilment cash flows and is released to profit as the risk expires. IFRS 17 does not prescribe a technique: insurers use confidence levels, cost of capital or tail measures, and must disclose the confidence level the result corresponds to. In this guide's example, a cost of capital approach gives a risk adjustment of 42.28.

At a glance

Covers
Non-financial risk only
Excludes
Financial risk and general operational risk
Techniques
Confidence level, cost of capital, CTE
Disclosure
Equivalent confidence level
Release
As risk expires
Option
Split change between service and finance
The risk adjustment for non-financial riskCovers: Non-financial risk only; Excludes: Financial risk and general operational risk; Techniques: Confidence level, cost of capital, CTE; Disclosure: Equivalent confidence level; Release: As risk expires; Option: Split change between service and finance.KEY FACTS AT A GLANCEThe risk adjustment for non-financial riskCoversNon-financial risk onlyExcludesFinancial risk andgeneral operational riskTechniquesConfidence level, cost ofcapital, CTEDisclosureEquivalent confidencelevelReleaseAs risk expiresOptionSplit change betweenservice and financeTax BakersThe risk adjustment for non-financial riskCovers: Non-financial risk only; Excludes: Financial risk and general operational risk; Techniques: Confidence level, cost of capital, CTE; Disclosure: Equivalent confidence level; Release: As risk expires; Option: Split change between service and finance.KEY FACTS AT A GLANCEThe risk adjustment fornon-financial riskCoversNon-financial risk onlyExcludesFinancial risk and general operational riskTechniquesConfidence level, cost of capital, CTEDisclosureEquivalent confidence levelReleaseAs risk expiresOptionSplit change between service and financeTax Bakers
Key facts at a glance, as set out in this guide.

What does the IFRS 17 risk adjustment cover?

Uncertainty from non-financial risks that arise from the insurance contracts: insurance risk, such as how many claims occur and how large they are; lapse risk; and expense risk. It does not cover financial risks, such as interest rates, which are reflected in discount rates or cash flow estimates, nor general operational risks that do not arise from the contracts. It reflects the insurer's own degree of risk aversion and the diversification benefit it considers when pricing.

A cost of capital example

An insurer holds capital against the non-financial risk in a group of contracts of 400 in year 1, 250 in year 2 and 100 in year 3, as the risk runs off. It requires a return of 6% a year on that capital, and discounts at 4%.

YearCapital heldCost at 6%Present value
140024.023.08
225015.013.87
31006.05.33
Risk adjustment42.28
Present value of the cost of capital by yearPresent value of the cost of capital by year23Year 114Year 25Year 3PV of capital cost
The risk adjustment runs off with the capital.

As capital is released year by year, so is the risk adjustment, giving a release pattern that follows the run-off of risk.

How does the confidence level technique work?

The insurer models the distribution of the present value of future cash flows and sets the risk adjustment as the difference between a chosen percentile and the mean. If the best estimate of claims is 1,000 and the 75th percentile of the distribution is 1,042, a risk adjustment of 42 corresponds to a 75% confidence level. Some insurers use a conditional tail expectation instead, the average of outcomes beyond a percentile, which captures the shape of the tail.

At what level is the risk adjustment set?

Often at portfolio or entity level, to reflect the diversification the insurer considers when pricing, and then allocated to groups of contracts, because the CSM and onerous tests are applied group by group. The allocation method should be applied consistently.

What must be disclosed?

The confidence level used to determine the risk adjustment. If the insurer uses a technique other than the confidence level, such as cost of capital, it must disclose the technique and the confidence level that the result corresponds to. Disclosed confidence levels typically fall between about 60% and 90%, which makes the figure a useful, if imperfect, way to compare insurers' prudence.

How is the risk adjustment released and presented?

Release from risk is part of insurance revenue each period. Changes relating to future service adjust the CSM; those relating to current and past service go to profit or loss. Insurers may choose to split the change in the risk adjustment between the insurance service result and insurance finance income or expense, or to present it all in the insurance service result.

How does reinsurance affect it?

For reinsurance contracts held, the risk adjustment represents the amount of risk transferred to the reinsurer, so it increases the reinsurance asset. See reinsurance contracts held.

How does it compare with the Solvency II risk margin?

Both are margins for non-financial risk, but the Solvency II risk margin uses a prescribed cost of capital approach on regulatory capital, while IFRS 17 lets each insurer choose its technique and reflect its own view of risk and diversification. The two figures often differ materially. See the general measurement model and insurance accounting under IFRS 17.

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Questions people ask

What is the risk adjustment for non-financial risk?

The compensation an insurer requires for bearing uncertainty about the amount and timing of cash flows arising from non-financial risk, part of the IFRS 17 fulfilment cash flows.

Which techniques are used to measure the risk adjustment?

IFRS 17 does not prescribe one; insurers use confidence levels, cost of capital or conditional tail expectation.

What confidence level must be disclosed?

The confidence level used, or, if another technique is used, the confidence level the result corresponds to.

Does the risk adjustment include financial risk?

No. Financial risks are reflected in discount rates or cash flow estimates.

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 IFRS 17 general measurement modelInsuranceReinsurance contracts heldInsuranceInsurance accounting: IFRS 17 in practice

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