The impact of IFRS 17 on insurance reports is a top concern for many insurers. IFRS 17 has resulted in various changes for the insurance industry, including how they execute business and reflect their financial reporting. The measurements used and the presentation of financials by insurers are guided by IFRS 17, and they differ vastly from the way things worked using IFRS 4 (Interim Accounting Standard). Insurers need to ensure that their accountants and actuaries use the appropriate measurements and present the company’s finances accurately and in alignment with the expectations of the new IFRS 17. It is a mandatory requirement for insurance companies to produce an annual report disclosing their financial statements, balance sheet, income statement, cash flow statement, as well as statements of changes in equity. In this article, ISB Optimus would like to share insights on the options available to insurers regarding their choice of measurement models for their insurance contracts and IFRS 17’s expectations of the presentation of insurers’ financials. 

Understanding Measurement  

Insurers have the options of 3 Measurement Models to choose from when they present their Insurance Contracts. They are: 

  • General Measurement Model (GMM) 
  • Premium Allocation Approach 
  • The Variable Fee Approach 

General Measurement Model (GMM) 

It is the expectation of insurance companies to disclose their expected profitability and cash flows with regards to their insurance contracts. According to Grant Thornton’s article on the General Measurement Model  the following points were shared.  

Under IFRS 17, the General Measurement Model (GMM) is the standard approach used to calculate/estimate liabilities for insurance contracts. The GMM model provides information on expected cash flows and the profitability of insurance contracts. Companies need to disclose the impact of IFRS 17 on their profitability and cash flows under IFRS 17 on their balance sheet. Furthermore, companies need to reflect how they compensate for bearing the uncertainty regarding the amount and timing of cash flows. Contractual Service Margin (CSM) has been introduced by IFRS 17, which reflects the expected profitability of a group of contracts.. 

Premium Allocation Approach (PAA) 

According to GAAP Dynamics’ article on How to Apply the PAA approach, the PAA approach is explained to be a simplified measurement model in IFRS 17 to account for insurance contracts. It is intended for insurance contracts of short duration (i.e., one year or less contract boundary) or in cases where the results under the PAA would not materially differ from applying the general measurement model, which is the primary (or default) accounting model in the standard. Under the PAA approach to measuring insurance contracts, the Liability of Remaining Coverage (LRC) is simplified by allowing an entity to base the amount on unearned premiums, rather than having to determine the fulfilment as required under the general measurement model.  

The Variable Fee Approach (VFA) 

The Variable Fee Approach (VFA) is another option of a measurement model in IFRS 17. According to IFRS17-How to choose a measurement model  the VFA is the measurement model for contracts with direct participation features. These are insurance contracts that are substantially investment-related service contracts under which an entity promises an investment return based on underlying items. For contracts with direct participation features it is mandatory to use VFA. The main benefit of applying VFA would be to better manage the volatility of the entity’s balance sheet.  The article further states that the difference between GM and VFA is the ability to bring economic movements into the CSM each period, in contrast to the GM where the CSM is only updated for changes in non-financial assumptions. 

Presentation of Company’s Financials in Alignment to IFRS 17 

One of the key aims of IFRS 17 is to provide transparency and quality to investor information. This will improve investor confidence in the insurance sector. According to an article by Editions Financial on the Key differences between IFRS4 and IFRS 17, this is achieved in the following ways: 

  • Combining current measurement of future cash flows with the recognition of profit over the period that services are provided under the contract. 
  • Presenting insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses. 
  • Requiring 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.” 

The Financial Reporting Council (FRC) has expectations of insurance companies with regards to reporting on their financial standing. According to KPMG’s article The FRC’s thematic review of IFRS 17 disclosures the following points are key take aways from the review: 

  • Tailored disclosures 
  • Comprehensive transition disclosures 
  • Granularity in accounting policies 
  • Transparency of APMs 
  • Tax implications 

It is of importance for insurers to disclose company-specific information providing quantitative and qualitative disclosures that enable the users to understand the subtle differences in the measurement and presentation of insurance contracts under IFRS 17. Companies need to consider the usefulness of the information when considering the appropriate level of aggregation or disaggregation in the disclosures. 

The FRC shares the importance of insurers needing to reflect both qualitative and quantitative information about the impact of transition to IFRS 17 in their financial reporting, including details of the underlying methodology used to measure their insurance contracts and the disclosure of Contractual Service Margin (CSM) and revenue reconciliations by transition method. 

Pertaining to granularity in accounting policies where IFRS 17 has not been prescriptive, companies need for share sufficiently detail, clarity and consistent explanations of policy choices with significant judgements and estimates. 

Following the adoption of IFRS 17, insurers are expected to provide high quality disclosures for Alternative Payment Models (APMs). Companies must provide detailed explanations including how APMs retained have been impacted from IFRS 17 and reconcile them with the most directly comparable line item in the financial statements and avoid unnecessary emphasis. 

Regarding tax implications, it is important for insurers to assess the impacts of IFRS 17 on current and deferred taxes very carefully and provide detailed explanations of the key drivers of change. 

It is clear from the content shared with you that IFRS 17 comes with various expectations and requirements on the part of the insurer. ISB Optimus hopes that the insights provided give you more clarity and guidance in your alignment with IFRS 17 regarding your choice of measuring model and in the presentation of your company’s financials going forward. Stay tuned for more valuable information in our next article on How Top Insurers Navigated IFRS 17 Challenges.

 

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