Insurance accounting: IFRS 17 in practice

Why is insurance accounting different?

An insurer is paid first and finds out its costs later, sometimes decades later. Its main liability is an estimate of claims that have not yet happened or have not been settled, and its profit depends on how that estimate unwinds. IFRS 4 allowed insurers to keep their local accounting, so results could not be compared across countries. IFRS 17 imposes one current-value model, so the same contract is measured the same way everywhere.

How does insurance accounting under IFRS 17 work?

How are contracts grouped?

Insurance contracts are measured in groups, not one by one. An insurer first identifies portfolios of contracts with similar risks managed together, such as motor or term life. Each portfolio is split into annual cohorts, contracts issued no more than a year apart, and each cohort into contracts that are onerous at initial recognition, contracts with no significant possibility of becoming onerous, and the rest. Profitable and loss-making contracts can therefore not be offset against each other.

Which measurement models are there?

• General measurement model (GMM): the default for all contracts; see the general measurement model.
• Premium allocation approach (PAA): a simplification for contracts with a coverage period of a year or less, or where it gives a similar result to the GMM; most motor, property and health business uses it. See the premium allocation approach.
• Variable fee approach (VFA): a mandatory adaptation of the GMM for direct participating contracts, such as unit-linked and with-profits business, where policyholders share in the returns of underlying items.

What is the contractual service margin?

The unearned profit in a group of contracts. At initial recognition, the CSM equals the amount by which expected premiums exceed expected claims, expenses and the risk adjustment, so no profit is recognised on day one. It is released to profit as the insurer provides cover, measured by coverage units, and adjusted when estimates of future cash flows change. See the contractual service margin.

What is the risk adjustment?

The compensation the insurer requires for bearing uncertainty about the amount and timing of cash flows from non-financial risk, such as how many claims arise. It is part of the liability and released as the risk expires. Insurers must disclose the confidence level it corresponds to. See the risk adjustment for non-financial risk.

What happens when contracts are loss-making?

A group that is expected to make a loss is onerous: the loss is recognised immediately and tracked as a loss component of the liability, which then reduces as the expected costs are incurred. Groups can also become onerous later if estimates worsen by more than the remaining CSM. See onerous groups.

How is reinsurance held accounted for?

Separately from the contracts it covers, with its own CSM representing the net cost or net gain of buying the cover. When an insurer recognises a loss on onerous underlying contracts that are reinsured, it can recognise a matching gain on the reinsurance. See reinsurance contracts held.

How are results presented?

The income statement shows an insurance service result, insurance revenue less insurance service expenses, separately from insurance finance income and expenses, the effect of the time value of money and financial risk on the liabilities. Insurance revenue excludes investment components, amounts repaid to policyholders whether or not an insured event occurs, so it is lower than the premiums written figure insurers used to report. Insurers can choose to show part of the insurance finance expense in other comprehensive income, to match investments measured at fair value through other comprehensive income.

How are insurers' investments measured?

Under IFRS 9, which most insurers adopted at the same time as IFRS 17 after a temporary exemption. Matching the measurement of assets and liabilities is a central design choice, because mismatches create volatility in profit or equity.

Which KPIs do insurers report?

Non-life insurers report the combined ratio, claims and expenses as a percentage of insurance revenue; life insurers report the CSM, new business CSM and its release, alongside solvency ratios that follow regulatory rules rather than IFRS 17. Solvency II in Europe and IFRS 17 share building blocks, best estimate cash flows and a risk margin, but differ in discount rates, contract boundaries and the absence of a CSM.

How does US GAAP differ?

US GAAP has no contractual service margin. Short-duration contracts are accounted for much like the PAA, and long-duration contracts follow the targeted improvements of ASU 2018-12, which update assumptions annually but recognise profit differently. Comparing IFRS and US insurers requires care.

Where can I read more about each insurance topic?

There are also guides on the variable fee approach, insurance acquisition cash flows, insurers' investments under IFRS 9, IFRS 17 disclosures, takaful and the combined ratio.

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