The International Accounting Standards Board
(IASB) published IFRS 17 on 18 May, which is designed to achieve the goal of a
consistent, principle-based accounting for insurance contracts. The new
Standard requires insurance liabilities to be measured at a current fulfilment
value and provides a more uniform measurement and presentation approach for all
The new financial reporting standard IFRS 17 will undoubtedly represent the
most significant change to insurance accounting requirements in over 20 years.
17 will require organizations to ensure data governance, lineage and
transparency across the entire reporting chain. This includes a wide spectrum
of data that will be used, from historic or current data (e.g. policy and
premium data or data to produce the risk adjustment) to forward-looking data
(e.g. data used to produce cash flow projections).The detailed requirements are
markedly different from existing models by the organization in a number of
critical aspects that will:
profit emergence patterns
up the recognition of losses on contracts that are expected to be onerous*1
complexity to valuation processes, data requirements, assumption setting and analyzing
and communicating results
to me, the most efficient way to approach this will be through an integrated
operating model and technology platform for Finance and Actuarial, enabling
them to work as one unified team with smoothing calculation and reporting
system. The organization can apply the Standard retrospectively approach or the
fair value approach. Those who are already applying IFRS 9 may retrospectively
re-designate and re-classify financial assets held in respect of activities
connected with contracts within the scope of the Standard.
organization shall measure a group of insurance contracts at the total of:
- the fulfilment cash flows (“FCF”), which comprise:
- estimates of future cash flows;
- an adjustment to reflect the time value of money and the financial risks associated with the future cash flows; and
- a risk adjustment for non-financial risk *2
- the contractual service margin (“CSM”) *3
organization shall present in profit or loss revenue arising from group of
insurance contracts issued and insurance service expenses arising from them,
comprising incurred claims and other incurred insurance service expenses.
Revenue and insurance service expenses shall exclude any investment components
and premiums (if that information is inconsistent with revenue presented.
An extract from an article*4 posted by Mr. Sai Srinivas Dhulipala:
In the current reporting, the
premium / contribution received by an insurer is shown as revenue, even though
the underlying profitability of the contracts is completely different. Hence it
is difficult to make out the financial soundness of the business written by the
insurer. The upgrade is to compare insurance revenue as per the new standard,
this can change the rankings significantly and hence the strategy of the
insurer has to change accordingly for the motive to capture the market. The
very definition of market share will have to change now. In the end, this will
turn out to be a great opportunity for the insurers to review their strategy.
They can review their priorities and re-orient their efforts in the right
direction. This will ultimately result into better performance by the insurers
An onerous contract is a contract in which the aggregate
cost required to fulfill the agreement is higher than the economic benefit to
be obtained from it. Such a contract can
represent a major financial burden for an organization.
*2 The compensation an organization requires for bearing
the uncertainty about the amount and timing of the cash flows arising from
non-financial risk as the entity fulfils insurance contracts.
A component of the carrying amount of the asset or liability for a group of
insurance contracts representing the unearned profit the entity will recognise
as it provides services under the insurance contracts in the group.