News
General Insurance: The Wide-ranging Implications of IFRS 17
04-Jul-2017
LONDON - The new accounting standard for insurance contracts, IFRS 17, will have wide-ranging implications for (re)insurers, and many firms are preparing for significant changes to their business operations.
After 20 years in the making, the International Accounting Standards Board (IASB) has published the new accounting standard for insurance contracts, IFRS 17. It will be effective from January 1, 2021, with prior-year comparative reporting required. Here we provide a taster of the key changes to the recognition and valuation of insurance contracts that will affect general insurers.
Currently, comparisons across different industries, products, companies and jurisdictions are difficult. The IASB wants to achieve consistent accounting for all insurance contracts by all companies around the globe (although the US has opted out and US GAAP will persist) and enable comparability with non-insurance products.
Not only will this affect general insurers’ operations, but it will also introduce changes to the presentation of results in the financial statements as well as potentially having an impact on the financial results themselves.
General measurement model
The general measurement model for liabilities under IFRS 17 is known as the building block approach (BBA) and all (re)insurance contracts will be measured as the sum of:
‘Fulfilment’ cash flows (updated at each reporting date), which are defined as:
The present value of probability-weighted expected cash flows (best estimate cash flows); plus
An explicit risk adjustment for insurance risk
Contractual service margin (CSM), which is the expected profit from the unearned portion of the contract
Under the BBA, the CSM is amortized and profits are recognized over time as insurance services are provided over the coverage period of the contract (over the term of the policy). However, losses from onerous (or, more simply, ‘loss making’) contracts are recognized immediately. After the end of the coverage period, any future profit or loss from the run-off of the liabilities (which, in general insurance, usually extends past the end of the coverage period) will flow straight through into the income statement.