General Model IFRS 17 Insurance Contracts – FAQ | IFRS

General model IFRS 17 Insurance contracts

In terms of recognition of items, the general model IFRS 17 Insurance contracts introduces two key terms: contractual service margin and fulfillment cash flows. General model IFRS 17 Insurance contracts

The contractual service margin is calculated at the start of the contract as the difference between the present value of the expected cash flows (plus a risk adjustment) and the present value of expected premiums. In its simplest form, the contractual service margin represents the overall profit expected on the insurance contract. General model IFRS 17 Insurance contracts

The fulfillment cash flows represent the estimate of the present value of the future cash outflows less the present value of the future cash inflows that will arise as the entity fulfills the contract. General model IFRS 17 Insurance contracts

A key principle of IFRS 17 is that no gains are recognized when the contract starts because the entity has not yet satisfied any of its performance obligations. Instead, the contractual service margin is recognized as the entity satisfies the performance obligation.

Worked example: The timing of gains recognition General model IFRS 17 Insurance contracts

Imagine an entity receives $900 in premiums at the start of an insurance contract spanning 3 years. It calculates the expected cash outflows to have a present value of $600 ($200 each year), giving a contractual service margin (expected profit) of $300.

In year 1, the entity would record $300 in insurance revenue and $200 for incurred claims. As the entity has received $900 but recorded only $300 in revenue, the remaining $600 will be held as a liability. General model IFRS 17 Insurance contracts

This represents and must be disclosed as the fulfillment cash flows of $400 (to be incurred at $200 a year) and the remaining contractual service margin of $200 (the remaining unearned profit).

The liability will decrease to $300 at the end of year 2 as $200 fulfillment costs are incurred and a further $100 contractual service margin is earned, and it will be repeated in year 3.

General model IFRS 17 Insurance contracts

The general model measures a group of insurance contracts as the sum of the following ‘building blocks’:

  • Fulfilment cash flows, comprising General model IFRS 17 Insurance contracts
    • An unbiased and probability-weighted estimate of future cash flows
    • A discount adjustment to present value to reflect the time value of money and financial risks
    • A risk adjustment for non-financial risk
  • A CSM representing unearned profit an entity will recognise as it provides service under the insurance contracts in the group

After initial recognition of a group of insurance contracts, the carrying amount of the group at each reporting date is the sum of:

  • The liability for remaining coverage, comprising:
    • The fulfilment cash flows related to future service allocated to the group at that date
    • The CSM of the group at that date, and General model IFRS 17 Insurance contracts
  • The liability for incurred claims comprising the fulfilment cash flows related to past service allocated to the group at that date

Liability for remaining coverage

An entity’s obligation to investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred (i.e., the obligation that relates to the unexpired portion of the coverage period).

Liability for incurred claims

An entity’s obligation to investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been reported and other incurred insurance expenses.

Simplification to the general model

An entity is permitted to simplify the measurement of eligible groups of insurance contracts by applying an approach referred to as ‘the premium allocation approach’. The premium allocation approach does not require an entity to measure the CSM explicitly or update the liability for remaining coverage for changes in discount rates and other financial variables. General model IFRS 17 Insurance contracts

See also: The IFRS Foundation

General model IFRS 17 Insurance contracts

In terms of recognition of items, the general model IFRS 17 Insurance contracts introduces two key terms: contractual service margin and fulfillment cash flows. In terms of recognition of items, the general model IFRS 17 Insurance contracts introduces two key terms: contractual service margin and fulfillment cash flows.

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