This blog is written by Mr. Afzaal Baig, Associate Internal Audit Services. Please read this blog and provide your valued comments.

Insurance Contracts

Overview

IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts.

IFRS 17 establishes the principles of the recognition, measurement, presentation and disclosure of insurance contract. The objective of IFRS 17 is to ensure that an entity provides all relevant information that represents those contracts.

IFRS 17 was issued in May 2017 and will become effective to annual reporting periods starting on or after 1 January 2021.

Key definitions

A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Recognition

An entity shall recognize a group of insurance contracts from the earliest of the following:

(a) The start of period of the group of contracts; (b) the date when the first payment from a policyholder in the group becomes due; and (c) for a group of onerous contracts, when the group becomes onerous.

Measurement

On initial recognition, an entity shall measure a group of insurance contracts at the total of:

(a) The fulfillment cash flows which comprise:

(I) estimates of future cash flows; (ii) an adjustment to reflect the time value of money and the financial risks associated with the future cash flows; and (iii) a risk adjustment for non-financial risk

(b) The contractual service margin

The estimates of future cash flows shall reflect all the information available to the entity. They should reflect the perspective of the entity, provided that the estimates of any relevant market variables are consistent with observable market prices.

Discount rates

The discount rates applied to the estimate of cash flows shall:

(a) reflect the time value of money ,  (b) be consistent with observable current market prices of those financial instruments whose cash flow  are consistent with those of the insurance contracts.

Risk adjustment for non-financial risk

The estimate of the present value of the future cash flows is adjusted to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of future cash flows that arises from non-financial risk.

Contractual service margin

The CSM represents the unearned profit of the group of insurance contracts that the entity will recognize as it provides services in the future. This is measured on initial recognition of a group of insurance contracts at an amount that, unless the group of contracts is onerous, results in no income or expenses arising from:

(a) the initial recognition of an amount for the FCF; (b) the derecognition at that date of any asset or liability recognised for insurance acquisition cash flows; and (c) any cash flows arising from the contracts in the group at that date.

Subsequent measurement

On subsequent measurement, the carrying amount of a group of insurance contracts at the end of each reporting period shall be the sum of:

(a) The liability for remaining coverage comprising:

(I) the FCF related to future services and; (ii) the CSM of the group at that date;

(b) The liability for incurred claims, comprising the FCF related to past service allocated to the group at that date.

Disclosures

An entity shall disclose qualitative and quantitative information about:

(a)  The amounts recognized in its financial statements that arise from insurance contracts

(b) The significant judgments, and changes in those judgments, made when applying IFRS 17.

(c) The nature and extent of the risks that arise from insurance contracts.

Afzaal Baig