INTRODUCTION

TO

IFRS 17

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 Christelle Bernhard, Consultant
Kevin Poulard, Consultant
& Marie-Cécile Verstappen, Senior consultant

« After more than 20 years of discussions, IASB (International Accounting

Standard Board) released IFRS 17 on the 18th May 2017. This standard replaces
IFRS 4 and will be applied from 1st January 2021 with retrospective application
as of 2020. However, most insurance companies want to be ready for dry
running in 2019. IFRS 17 is the first comprehensive and actual international IFRS
Standard establishing the accounting for insurance contracts. IFRS 17 increases
transparency and comparability between insurers and introduces consistent
accounting for all insurance contracts based on a current measurement
model. This revolution in the measurement of insurance contract liabilities
and in disclosure will be sensibly aligned with the adoption of IFRS 9, financial
instruments. The impacts will be major for insurance companies, both for the
actuarial modelling and reserving fields and also for the production of accounts.

Therefore, the implementation of IFRS 17 in an insurance company will have

an impact on several actuarial departments and in particular on modelling,
reserving and data management. »

CONTENTS
02
INTRODUCTION PREMIUM ALLOCATION
APPROACH
08
04 10
VARIABLE FEE
IFRS 17 OVERVIEW APPROACH
GLOSSARY

06
BUILDING BLOCK
APPROACH
11
IFRS 17 JARGON

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01
INTRODUCTION WHO IS CONCERNED?
• IFRS 17 establishes principles for • IFRS 17 is an international norm.
the recognition, measurement, For European countries, the norm is
presentation and disclosure of mandatory for listed companies.

IFRS 17 TIMELINE
insurance contracts. • European companies seem to be
• This new standard has to be applied to more prepared thanks to the previous
all insurance and reinsurance contracts implementation of Solvency II.
separately (issued or held).
• This norm is principle based and its However, you
implementation will impact several should not
Go live actuarial sectors and in particular underestimate IFRS
Modeling, Reserving, Accounting and
Data Management. 17 implementation
cost…
Production
of comparatives

IASB (International

SOLVENCY II VS IFRS 17
Accounting Standard
Board) has released the
new accounting norm
for insurance contracts
named IFRS 17 (IFRS 4
Phase 2)

IFRS 4
Phase 1 issued
SOLVENCY 2 IFRS 17
1st January
2021
SCOPE European International
Project on insurance
accounting approved
1st January APPROACH Prescriptive Principle based
2020
Grouping by year
GROUP Separating by homogenous of issue and profitability
OF CONTRACTS risk groups (HRG) (separation between onerous
and non onerous contracts)
18th May
Amortization during the
2017 Recognized immediately life of the group
PROFIT in own funds of contracts (No initial
gain or loss recognition)

2004 RISK MARGIN Cost of capital 6% Method has to be

chosen by the company

TECHNICAL
PROVISIONS Best estimate approach
CALCULATION
1997
02 03
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02IFRS 17 LIFE OF A GROUP
OF INSURANCE CONTRACTS
OVERVIEW Reporting date N-1

Initial
Reporting date N Reporting date N+1

End of
coverage

GOALS
recognition
period

Claim 4
Claim 2 Claim 3
Claim 1 Reported
Not yet Not yet
Reported after closing
reported occured
date

Increase Increase the Produce financial Liability for incurred claims1 Liability for remaining coverage
transparency and understanding of statement & FCF related to claims incurred FCF related to future services
comparability the contracts. disclosure on a (reported or not) not yet paid + CSM remaining
between insurers. current measurement
model Insurance contract liability

LEVEL OF AGGREGATION
• At inception, when insurance contracts are
recognized, Insurance contracts will be aggregated
into groups.
• Once a group is formed, it cannot be modified.
• After initial recognition, calculations will be
3 MEASUREMENT
APPROACHES
performed at the group level for the subsequent
measurements and disclosures.
BBA PAA VFA
Portfolio: Group composed of contracts with similar risks
Annual cohort1 Building Block Approach Premium Allocation Approach Variable Fee Approach
At initial recognition, groups of contracts should be • General Model • Simplification of the BBA for • Mandatory for
disaggregated into group that are: • Default model for insurance/reinsurance contracts contracts with
• Onerous (FCFInitial Recognition<0) insurance/reinsurance • Can be used for contracts with discretionary
• Profitable, with no significant risk of becoming onerous contracts coverage period less than 1 year – participation features
(FCFInitial Recognition>Trigger) Typically non-life insurance contracts
• Profitable, with significant possibility of becoming 1
If claims are paid after the coverage period end, the group will not be extinct. For the reporting date following the end of the coverage
onerous (0≤ FCFInitial Recognition ≤Trigger) period, the Insurance contract liability will be divided as follows:
• The Liability for Remaining coverage will be 0.
• The Liability for Incurred claims component is calculated based on the PV of the estimate of future CF (Claims paid). Therefore,
An Entity shall not include contracts issued more than one year appart in the same group - §22 IFRS 17 May 2017
1
this component will be different than 0.
04 05
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03BUILDING BLOCK SUBSEQUENT
MEASUREMENT
APPROACH KEY COMPONENTS

MEASUREMENT MODEL Changes in

FCF CSM

Interest rates
current estimates accretion
Present Value of
Future Cash Flows
Fulfilment Past and Current Services:
+ = Cash Flows Release of Risk adjustment
Adjustment for Changes in future CF

+ =
Non-Financial Risk
Unearned Profit Insurance Obligations
(Contractual Service Margin) (Insurance Contract Liabilities
Reported on the Balance Sheet)
Financial risk assumptions:
Time value of money

INITIAL RECOGNITION Future services:

Changes in the Risk adjustment
related to future services
Changes in future CF

Cash Cash
Inflows Outflows

Time Value Risk

Claims, of Money
Adjustment
Adjust CSM
Expenses Discount rates
Related to
Premiums non financial risk

Contractual
Service Profit
Margin Other
Or Comprehensive and Loss (P&L)
Income 1 – Insurance
(OCI) service result
Fulfilment Cash Flows (FCF)

The Contractual Service Margin represents In consequence, at initial recognition: CSM allocation2
unearned profit of a contract. • If Gain: CSM is written
One key idea behind IFRS • If Loss (Onerous contracts): Amount of
Loss recognized in the P&L and CSM=0
17 is that insurers are not CSM is calculated for a group of
1
Accounting policy choice – For a given period, insurance finance income or expenses could be:
• Recognized entirely in the P&L
allowed to recognize as insurance contracts. • Disaggregated between:
• P&L for Insurance finance income or expenses calculated by using discount rates locked in at inception
profit the gain estimated • OCI for changes in discount rates
2
The allocation of the CSM in the P&L is calculated based on the number of coverage units provided during the period
at initial recognition. 06 07
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04PREMIUM INITIAL RECOGNITION
OF THE LRC
ALLOCATION
APPROACH Premiums
Insurance
acquisition CF
paid at
inception1 Derecognition of
pre-coverage
received cash flows2
at inception (+/-)

COMPARISON Liability for

WITH THE GENERAL MODEL

Remaining
Coverage at
Or Inception

SUBSEQUENT
• The Premium Allocation Approach is • This simplified model will impact the
a simplification of the General Model. insurance contract liability calculations:
It can be applied if the 2 following • The Liability for Remaining
conditions are met: Coverage will ba approximated and

MEASUREMENT OF THE LRC

• Short-term coverage insurance the CSM and RA components will
contract (coverage period less than not be computed1.
1 year). • The Liability for Incurred Claims
• No significant variability in the FCF will be computed in the same way
related to the LRC measurement. than the BBA.
Accretion of Insurance
interest 4 revenue for
Insurance (+) coverage
acquisition provided5
Premiums Amortization (-)
CF paid of the
received insurance Investment
during the
during the
BBA PAA period3 acquisition component
period CF3 paid or
(-) (+)
(+) transferred
(-)

Estimate of future CF Unearned Premiums

LIABILITY FOR Time Value of Money Liability for
Liability for
Remaining
REMAINING COVERAGE (Time Value of Money)2 Remaining
Risk Adjsutment Coverage
Coverage
(EoP)
CSM (BoP)

LIABILITY FOR Estimate of future CF Estimate of future CF

INCURRED CLAIMS Time Value of Money (Time Value of Money)3 1
Accounting policy choice: Insurance acquisition cash flows could be recognized as expenses when it occurs if the coverage period is no more than a year. In this case, this component
Risk Adjustment Risk Adjustment will not appear in the LRC measurement – §59(a) IFRS 17 May 2017
2
Related to the fact that an entity should recognize an asset or liability for insurance acquisition cash flows that it pays or receives before the group is recognized – §27 IFRS 17 May 2017
3
Accounting policy choice: Insurance acquisition cash flows could be recognized as expenses when it occurs if the coverage period is no more than a year. In this case, this component
will not appear in the LRC measurement – §59(a) IFRS 17 May 2017
1
Unless Onerous contracts that must be measured using the BBA 4
If cash flows related to incurred claims are expected to be paid or received in more than a year from the claims are incurred, the entity is required to adjust future cash flows for the TVM
2
If the entity expects that the time between providing each part of the coverage and the related premium due date is more than a year, it – §59(b) IFRS17 May 2017
should adjust the carrying amount of the LRC to reflect the TVM – §56 IFRS 17 May 2017 5
Insurance revenue for the period is equal to the expected premium received allocated to each period of the coverage – §B126 IFRS 17 May 2017 :
3
If cash flows related to incurred claims are expected to be paid or received in more than a year from the claims are incurred, the entity is • On the basis of the passage of time.
required to adjust future cash flows for the TVM – §59(b) IFRS17 May 2017 • On the expected timing of incurred insurance service expenses if the expected pattern of release of risk differs from passage of time (Ex: contracts with seasonal effects linked to hurricans).
08 09
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05VARIABLE FEE 07IFRS 17
APPROACH
• The Variable Fee Approach is a • In these insurance contracts , the
JARGON
modification of the General Model entity has an obligation to pay to
at the level of the calculations of the the policyholder an amount equal
CSM. to the share of the returns from the
• It must be applied to insurance underlying items minus an insurer’s
contracts with direct participation fee. • IFRS 1 7 Insurance Contracts • In the issue of The Essentials n°4 of
features1. • Changes to the insurer’s fee adjust introduces fundamental changes September 2017, IFRS Foundation has
the CSM. to insurance accounting for some translated the existing terminology
insurers . and metrics into the language of

06GLOSSARY
IFRS 17 to help investors adapt to
the changes. (http://www.ifrs.org/
investor-centre/the-essentials/).

• BBA: Building Block Approach – timing of the cash flows arising from
the main measurement model under non-financial risk. EXISTING EQUIVALENT IMPACT
IFRS17. • CF: Cash flows. METRICS IFRS 17 MEASURE OF IFRS 17
• VFA: Variable Fee Approach - • eF C F : Fulfilment Cash Flows:
mandatory approach for contracts Present value of the cash flows + Risk Insurance revenue under IFRS 17 will be similar
with direct participation features. adjustment for non-financial risks. Earned premiums Insurance revenue to earned premiums for non-life business.
• PAA: Premium Allocation Approach • TVM: Time value of money. However, insurance revenue will be provided for all
contracts, including life and participating contracts.
– simplification of the BBA which can • LIC: Liability for Incurred Claims.
be used for contracts with less than 1 • eL R C : Liabilit y for remaining Operating profit subtotals are not defined
year coverage period. coverage. in IFRS 17 (or in other IFRS Standards), but are likely
• CSM: Contractual service margin: • P&L: Profit & Loss. to refer to the sum of the insurance service result
Insurance service result plus the net financial result.
the amount of liability held on top • OCI: Other Comprehensive Income. Operating profit The amounts presented in the net financial
plus net financial result
of the best estimate liability and risk • Onerous Contract: A contract that result will be affected by whether and to what
adjustment to eliminate any day one is expected to generate loss; the CSM extent a company presents gains
profits. of these contracts is equal to zero. and losses in Other Comprehensive Income.
• Risk Adjustment: The amount • BoP: Beginning of Period.
required by entities to bear the • EoP: End of Period.
uncertainty about the amount and

1
ie insurance contracts meeting the following conditions at initial recognition:
• the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;
• the entity expects to pay to the policyholder an amount equal to a substantial share of the returns from the underlying items; and
• a substantial proportion of the cash flows the entity expects to pay to the policyholder should be expected to vary with cash flows
from the underlying items.
10 11
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 EXISTING EQUIVALENT IMPACT
METRICS IFRS 17 MEASURE OF IFRS 17
The CSM of new business determined under IFRS 17
Contractual service represents the unearned profit on in-force business.
New business profit The roll forward of the CSM will provide information
margin—CSM
about the amount of CSM added by new contracts
written in the period.

Experience adjustments Prior-year claims adjustments are required to be

Claims adjustments—non-life separately disclosed as a component
and change in estimates
of the insurance contract liability roll forward.

UPR will be included in the overall insurance liability

in the balance sheet and be separately identified
as the ‘liability for remaining coverage’ in
Unearned premium Liability for remaining the notes with a detailed roll forward provided.
reserves—UPR coverage—LRC Investors will be able to analyse the LRC
by components—present value of cash flows,
adjustment for risk and CSM.

Claim or loss reserves will be included in the

overall insurance contract liability
on the balance sheet, and separately identified
Claim or loss reserves Liability for incurred as ‘liability for incurred claims’ in the notes,
claims—LIC with a detailed roll forward.
The liability equals the probability-weighted expected
cash outflows plus explicit adjustment for risk.
Discounting will be applied if material.

DAC will not be presented as an

asset under IFRS 17. Contract acquisition costs are
included in insurance contract fulfilment cash flows
Deferred acquisition and are therefore reflected in the overall insurance
costs—DAC contract liability without being identified as a separate
component in the balance sheet (although the allocated
acquisition cost expense is reported separately in the
income statement).

Contractual service Equivalent to the CSM portion of

Value in force—VIF the liability under IFRS 17, although the measurement
margin—CSM
principles differ.

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12 13
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