IFRS 17

IFRS 17 Insurance Contracts is the standard in International Financial Reporting Standards that sets out how insurance contracts are recognised, measured, presented and disclosed. It requires an insurer to measure its obligations using current estimates of future cash flows, and to recognise profit as it provides insurance service over the life of a contract and not when premiums are received. It applies to insurance contracts issued, reinsurance contracts held and issued, and certain investment contracts with discretionary participation features.

The International Accounting Standards Board issued the standard in May 2017 and amended it in June 2020. It took effect for annual periods beginning on or after 1 January 2023, replacing IFRS 4, an interim standard from 2004 that had allowed insurers to continue a wide variety of national practices. The result had been that insurers' accounts were difficult to compare across countries, and even between subsidiaries of one group.

Under the general model, a group of contracts is measured as the sum of two parts.

• Fulfilment cash flows. These comprise probability-weighted estimates of future cash flows, such as premiums, claims, benefits and expenses; an adjustment to discount them to present value using rates that reflect the characteristics of the cash flows; and a risk adjustment for non-financial risk, which is the compensation the insurer requires for bearing uncertainty about the amount and timing of the cash flows.
• The contractual service margin. This represents the unearned profit the insurer expects to earn as it provides services. At initial recognition it is set so that no profit arises on day one.

The fulfilment cash flows are updated at each reporting date using current assumptions. Changes relating to future service adjust the contractual service margin, which is released to profit or loss over the coverage period. If a group of contracts is expected to make a loss, it is onerous: there is no margin, and the loss is recognised in profit or loss immediately.

The carrying amount of a group is presented as a liability for remaining coverage, for service not yet provided, and a liability for incurred claims, for events that have already happened, including claims incurred but not reported. The estimation of the latter draws on claims reserving methods.

The premium allocation approach is an optional simplification for contracts with a coverage period of one year or less, or where it would give a result close to the general model. The liability for remaining coverage is based on premiums received less amounts recognised as revenue, much like an unearned premium reserve. It is widely used for short-term property and casualty business and resembles earlier premium accounting.

The variable fee approach is a mandatory modification for contracts with direct participation features, such as unit-linked and with-profits policies, in which policyholders share in the returns on a pool of underlying items. The insurer's share of those returns is treated as a fee for service, and changes in it adjust the contractual service margin.

Contracts are grouped for measurement. An insurer first identifies portfolios of contracts with similar risks that are managed together. Each portfolio is divided into at least three groups: contracts that are onerous at initial recognition, contracts with no significant possibility of becoming onerous, and the rest. A group may not include contracts issued more than one year apart, a requirement known as annual cohorts, which prevents profits on new business from concealing losses on old business. When the European Union adopted the standard it allowed an optional exemption from annual cohorts for certain contracts where returns are shared between generations of policyholders.

Insurance revenue reflects the service provided in the period and excludes investment components, meaning amounts that will be repaid to the policyholder in all circumstances. Deposits are therefore no longer shown as revenue, and premiums written are not a line in the income statement. The insurance service result, being revenue less claims and expenses, is shown separately from insurance finance income or expenses, which arise from discounting and financial risk. An insurer may choose to present part of the effect of changes in discount rates in other comprehensive income, to reduce mismatches with the accounting for its assets under IFRS 9.

Reinsurance contracts held are accounted for separately from the underlying contracts, using a modified version of the model, so that a reinsurance cession does not simply net against the gross liability.

On first application an insurer applied the standard retrospectively where practicable. Where that was not possible, as for long-running life business with limited historical data, it could use a modified retrospective approach or measure the margin by reference to fair value.

The standard is separate from prudential rules. Capital requirements such as the solvency capital requirement under Solvency II use their own valuation basis, although the two share concepts such as best-estimate cash flows and a margin for risk. US accounting rules for insurers remain different, with their own targeted reforms for long-duration contracts. Critics point to the complexity of the standard and to the degree of judgement in discount rates and risk adjustments, which limits comparability in practice; supporters point to the greater visibility of profit sources and of loss-making business.

• IFRS Foundation