IFRS 17: Insurance Contracts – Detailed Lecture Notes

Module 1: Introduction to IFRS 17

1.1 What is IFRS 17?

IFRS 17 is the International Financial Reporting Standard issued by the IASB that establishes principles for
the recognition, measurement, presentation, and disclosure of insurance contracts. It replaces IFRS 4, which
was an interim standard. IFRS 17 aims to ensure that an entity provides relevant information that faithfully
represents those contracts, enhancing comparability and transparency in financial statements.

1.2 Why was IFRS 17 Introduced?

IFRS 4 allowed insurers to use local accounting standards, which led to inconsistency. For example, two
companies with identical insurance contracts might report completely different profits. IFRS 17 resolves
these issues by introducing a consistent model across all jurisdictions. It brings: - A single accounting model
for all insurance contracts. - Better alignment with other IFRS standards (like IFRS 9). - An economic view of
profit emergence over time.

1.3 Objectives of IFRS 17 - To ensure entities provide relevant, comparable information. - To provide a clear
picture of the insurer’s financial position. - To reflect the true economics of insurance contracts over their
lifecycle.

1.4 Key Definitions - Insurance contract: A contract where one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to compensate them upon a specified
uncertain future event. - Fulfilment cash flows (FCF): The unbiased, probability-weighted estimates of
future cash inflows and outflows that will arise as the entity fulfils the insurance contract. - Contractual
service margin (CSM): The unearned profit that an entity recognizes as it provides services over the
contract term. - Risk adjustment: An adjustment for non-financial risk, representing the compensation the
entity requires for bearing the uncertainty about the amount and timing of the cash flows.

Module 2: Scope and Classification

2.1 Scope of IFRS 17 IFRS 17 applies to: - Insurance and reinsurance contracts issued. - Reinsurance
contracts held. - Investment contracts with discretionary participation features issued by insurers (provided
the insurer also issues insurance contracts).

2.2 Contracts Outside the Scope - Product warranties under IFRS 15. - Financial guarantees under IFRS 9
(unless they meet the insurance definition). - Employers’ assets and obligations under employee benefit
plans (IAS 19).

2.3 Insurance vs Investment Contracts - Insurance contracts include significant insurance risk. -
Investment contracts are financial instruments with no insurance risk (measured under IFRS 9).

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Module 3: Recognition and Measurement

3.1 Initial Recognition Insurance contracts should be recognized: - From the beginning of the coverage
period. - When the first payment from the policyholder is due. - When the contract becomes onerous.

3.2 Measurement Models There are three measurement models under IFRS 17: - General Measurement
Model (GMM) – default model. - Premium Allocation Approach (PAA) – simplified model for short-
duration contracts. - Variable Fee Approach (VFA) – applicable to contracts with direct participation
features.

Module 4: General Measurement Model (GMM)

4.1 Components of GMM The liability of an insurance contract is made up of: 1. Fulfilment Cash Flows
(FCF), including: - Expected future cash inflows and outflows. - The effect of discounting. - A risk adjustment
for non-financial risk. 2. Contractual Service Margin (CSM): - Represents the unearned profit from the
contract. - CSM ensures no profit is recognized on initial recognition.

4.2 Day 1 Accounting Entries If expected FCF is positive (i.e., a profit), the profit is deferred into the CSM. If
the contract is onerous (a loss), the loss is recognized immediately in P&L.

4.3 Subsequent Measurement The liability is updated for: - Changes in estimates of future cash flows. -
Time value of money (finance income/expense). - CSM is adjusted and recognized as services are provided.

4.4 Example A 10-year life insurance contract with estimated future inflows of $100,000 and outflows of
$80,000 (discounted), and a risk adjustment of $5,000: - FCF = $100,000 - $80,000 - $5,000 = $15,000. - This
$15,000 is recorded as CSM and amortized over the 10-year service period.

Module 5: Premium Allocation Approach (PAA)

5.1 When to Use PAA PAA can be applied if: - The coverage period is one year or less. - It produces results
that are not materially different from the GMM.

5.2 Measurement Under PAA - Liability for remaining coverage (LRC): Similar to unearned premium
reserve. - Liability for incurred claims (LIC): Measured as the present value of expected future claims,
adjusted for risk.

5.3 Onerous Contracts If expected claims exceed premiums, the contract is considered onerous and a loss
is recognized immediately.

5.4 Example A one-year car insurance policy collects $1,200 in premiums. The expected claims and
expenses are $1,100. No loss is recorded, and LRC is initially set at $1,200, to be released as coverage is
provided.

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Module 6: Variable Fee Approach (VFA)

6.1 When is VFA Used? Applied to contracts with direct participation features, where: - The policyholder
shares in a clearly identified pool of underlying items. - The entity's compensation is a variable fee based on
investment performance.

6.2 Measurement Features - Similar to GMM but includes adjustments for changes in the fair value of
underlying assets. - The CSM is adjusted for changes in the entity’s share of the returns.

6.3 Example A participating life insurance policy promises a share in the performance of a mutual fund
portfolio. As the fund value changes, both the insurer's fee and the policyholder’s benefit change
accordingly, and so does the CSM.

Module 7: Financial Statement Presentation

7.1 Statement of Financial Position - Assets and liabilities from insurance contracts are presented
separately. - Portfolios of insurance contracts are aggregated.

7.2 Statement of Profit or Loss - Insurance revenue: Derived from release of LRC and CSM. - Insurance
service expenses: Claims incurred, changes in risk adjustment. - Finance income/expenses: Unwinding of
discounting effects.

Module 8: Disclosures

8.1 Purpose of Disclosures To help users understand: - The effects of insurance contracts on financial
performance. - Judgments used. - The nature and extent of risks.

8.2 Key Disclosures - Reconciliation of opening and closing balances for liabilities. - Analysis of insurance
revenue and service expenses. - Information about CSM. - Disaggregated data (e.g., by portfolio or contract
group).

Module 9: Reinsurance Contracts

9.1 Reinsurance Issued vs Held - Similar principles as direct contracts but with opposite flows. -
Reinsurance contracts do not include a CSM gain—expected gains are recognized immediately.

9.2 Example An insurer enters into a reinsurance treaty covering catastrophic losses. If future recoveries
exceed premiums paid, the gain is recorded immediately in the P&L.

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Module 10: Transition to IFRS 17

10.1 Transition Methods 1. Full Retrospective: Reconstruct historical data as if IFRS 17 always applied. 2.
Modified Retrospective: Use historical data where available, estimates otherwise. 3. Fair Value Approach:
Use fair value of contract at transition date.

10.2 Transition Challenges - Historical data may not be available. - System changes and training are
required. - Determining appropriate groupings of contracts.

Module 11: Case Studies

11.1 Life Insurance Using GMM - 20-year life insurance policy. - Step-by-step: estimate FCF, determine risk
adjustment, calculate CSM. - Annual amortization of CSM based on coverage units.

11.2 Motor Insurance Using PAA - 12-month motor insurance contract. - Premiums received = $500. -
Recognize $500 as liability, release monthly as revenue.

Module 12: Auditor Focus and Implementation Challenges

12.1 Key Auditor Areas - Adequacy of actuarial assumptions. - Judgments in grouping and discounting. -
Reasonableness of risk adjustments and CSM.

12.2 Practical Issues Faced by Companies - Need for data granularity and historical info. - IT system
upgrades. - Coordination between actuarial and finance departments.

Practical Examples of IFRS 17 Implementation by Companies

1. Allianz SE (Germany): Allianz, one of the world’s largest insurers, began reporting under IFRS 17 in 2023.
The company developed a group-wide actuarial and IT infrastructure to ensure data consistency across all
subsidiaries. Allianz emphasized the CSM and introduced new disclosures reflecting the fulfillment cash flow
approach.

2. Aviva (UK): Aviva's 2023 financial statements demonstrated the transition from IFRS 4 to IFRS 17. They
used the modified retrospective approach for their long-term life insurance contracts and highlighted the
impact on equity and profit due to changes in recognition timing.

3. AXA (France): AXA used IFRS 17 to revamp their investor communications by disclosing detailed
insurance service results. Their quarterly reports now separate underwriting results from financial
components, aligning with IFRS 17's presentation model.

4. Prudential PLC (UK/Asia): Prudential implemented IFRS 17 across their operations in Asia and Africa,
regions with diverse product offerings. The standard led to enhancements in data governance, actuarial
modeling, and contract groupings for performance analysis.

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5. Ping An Insurance (China): As one of China's largest insurers, Ping An transitioned to IFRS 17 with a
strong focus on IT system upgrades and embedded analytics. Their financial reports now include detailed
CSM analysis, reflecting long-term profit emergence patterns.

6. Jubilee Life Insurance (Pakistan): Jubilee Life, one of Pakistan’s leading life insurance providers,
transitioned to IFRS 17 with considerable investment in actuarial models and data systems. The company
aligned its contract classification and liability measurement models with IFRS 17 and enhanced its
disclosure practices to meet the standard’s transparency requirements. Jubilee Life's transition served as a
key case study for insurers in emerging markets.

These examples show that global and regional insurers are not only complying with the standard but also
leveraging it to enhance internal reporting, investor relations, and strategic decision-making.

Certification Resources for IFRS 17

If you are looking to earn a certificate in IFRS 17, consider the following platforms that offer recognized
certification courses:

1. ACCA (Association of Chartered Certified Accountants): - Offers an online course in “Certificate in

International Financial Reporting” which includes IFRS 17 modules. - [Link]

2. IFRS Foundation (via IASB): - Provides official training materials and access to webinars, standards, and
updates. - [Link]

3. Coursera (offered by institutions like University of London): - Hosts IFRS-related content under
financial reporting and accounting programs. - [Link]

4. PwC’s Academy & KPMG Learning Portal: - Big Four firms offer detailed IFRS 17 online training sessions
and certifications. - Visit their respective learning portals.

5. Udemy: - Offers introductory and intermediate courses on IFRS 17 and IFRS standards in general. -
[Link]

Be sure to check if the course includes a downloadable certificate, and whether it qualifies for CPD hours if
you’re a finance or audit professional.

End of Detailed Lecture Notes – IFRS 17