The International Accounting Standards Board (IASB) has now issued a new Standard to replace the current IFRS 4 Insurance Contracts.
IFRS 17 Insurance Contracts (IFRS 17) eliminates inconsistencies and weaknesses of existing practices through a single principle-based framework to account for all insurance contracts, including reinsurance contracts.
General model (the building block approach)
A key feature of the new framework is to measure all insurance contracts as the sum of fulfilment cash flows and a contractual service margin. Fulfilment cash flows, being the present value of probability-weighted expected cash flows plus an explicit risk adjustment for insurance risk, are updated at each reporting date for changes in estimates of future cash flows and changes in market assumptions, such as interest rates.
Any changes in estimates of future cash flows are recognised immediately in profit or loss or adjust unearned profits (the outstanding contractual service margin) depending on whether they relate to past coverage or future coverage, respectively. Entities may choose to present market changes that affect insurance finance expense (i.e. changes in the applicable discount rate) either in profit or loss or disaggregate it and present in profit or loss and other comprehensive income.
Profits are recognised over time as insurance services are provided while losses are recognised in full when expected.
For measurement purposes contracts are aggregated into appropriate groups and onerous and non-onerous contracts.
For contracts that have no significant expected changes in estimates before the claims are incurred or contracts that cover a period less than one year, insurers may elect to apply a simplified approach called the Premium-allocation approach. The Premium-allocation approach does not require separate identification of the unearned profit nor does it require liabilities to be discounted if expected to be settled within 12 months. This is the approach expected to be used by most non-life insurers for most of their contracts.
Addressing discretionary participation features
To address contracts with discretionary participation features, the standard includes a variable fee approach. Under the variable fee approach the related obligations are measured to reflect changes in fair value of all underlying items.
The Standard includes demanding new requirements for presentation and disclosure to enhance comparability. Presentation of insurance revenue in the statement of comprehensive income is consistent with the presentation of revenue in accordance with IFRS for other transactions. Along with other presentation changes, there are also a number of new disclosure requirements including significant judgements disclosures and disclosures of risks and risk mitigation.
IFRS 17 is effective for years beginning on or after 1 January 2021. Insurers will apply either a Full retrospective approach, Modified retrospective approach or Fair value approach on transition for each group of insurance contracts separately, based on an assessment of practicability. The standard also includes an option for insurers to reassess the classifications of their financial assets under IFRS 9 Financial Instruments on transition.
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