IFRS 17 Insurance Contracts

Background

According to latest update of IASB, ‘’IFRS 17 Insurance Contracts’’ will be effective from 1 January 2023 (earlier it was being effective on 1 January 2021).

Note- The Board is currently finalising its amendments to aid implementation of IFRS 17 and the final version of IFRS 17 is likely to be issued by June 2020. Thus, the below highlights of IFRS 17 is based on current available version of standard.

The Board also decided to extend the exemption currently in place for some insurers regarding the application of IFRS 9 Financial Instruments  to enable them to implement both IFRS 9 and IFRS 17 at the same time.

Requirement of IFRS 17

IFRS 17 will replace current insurance standard IFRS 4. 

IFRS standards are established in order to have a common accounting language, so business and accounts can be understood and compared from company to company and from country to country. IFRS 4 explains how to disclose insurance contracts, but to put it simple, there are too many issues with IFRS 4 to make a good comparison among insurance companies and to compare an insurance company to a non-insurance company, therefore IFRS 17 is introduced.

IFRS 17 Insurance contracts combine features of both a financial instrument and a service contract. In addition, many insurance contracts generate cash flows with substantial variability over a long period. To provide useful information about these features, IFRS 17:

• combines current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract;
• presents insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses; and
• requires an entity to make an accounting policy choice of whether to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income.

Scope

An entity shall apply IFRS 17 to:

(a) insurance contracts, including reinsurance contracts, it issues;

(b) reinsurance contracts it holds; and

(c) investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.

Note: Insurance Contracts has further described in detail under IFRS 17

• identifies as insurance contracts those contracts under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder;
• separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts;
• divides the contracts into groups that it will recognise and measure;
• recognises and measures groups of insurance contracts at:
1. a risk-adjusted present value of the future cash flows (the fulfillment cash flows) that incorporates all of the available information about the fulfillment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset)
2. an amount representing the unearned profit in the group of contracts (the contractual service margin (CSM));
• recognises the profit from a group of insurance contracts over the period the entity provides insurance cover, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognises the loss immediately;
• presents separately insurance revenue (that excludes the receipt of any investment component), insurance service expenses (that excludes the repayment of any investment components) and insurance finance income or expenses; and
• discloses information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity.

IFRS 17 includes an optional simplified measurement approach, or premium allocation approach, for simpler insurance contracts.