Assignment

On
The Impact of IFRS 17 on Insurance Financial Statements
Course name: Accounting for Specialized Institution
Course Code: AIS 3206

Submitted by Submitted to
Md. Toslim Uddin Fahimul Kader Siddique
ID No: 12008026 Assistant Professor
Regi: 000014289 Dept. Accounting & Information
Systems
Status: Third Year, Second
Semester Begum Rokeya University Rangpur.
Dept. Accounting & Information
Systems
Begum Rokeya University
Rangpur.

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Short Report on the Transition from IFRS 4 to IFRS 17: Impact on
Insurance Contracts, Assets, Liabilities, and Profits

1. Introduction

The transition from IFRS 4 (Insurance Contracts) to IFRS 17 (Insurance Contracts)

marks a major shift in the accounting and reporting framework for insurance companies.
While IFRS 4 allowed insurers to continue using national accounting practices with
minimal changes, IFRS 17 introduces a comprehensive, standardized approach for the
recognition, measurement, and reporting of insurance contracts. This transition has
significant implications for how insurance contracts, assets, liabilities, and profits are
reported in financial statements.

2. Key Changes in the Reporting of Insurance Contracts

• IFRS 4 allowed insurers considerable flexibility in applying accounting practices

for insurance contracts. It permitted the use of a wide range of local accounting
standards and methods, leading to inconsistencies in how insurance contracts were
reported across different jurisdictions.
• IFRS 17 replaces this flexibility with a more uniform, principles-based framework.
The key changes under IFRS 17 include:
o Current value measurement: Insurance contracts are now valued based
on current assumptions of future cash flows, discounted for time value, and
adjusted for risk.
o Contractual Service Margin (CSM): A new concept introduced under
IFRS 17, the CSM represents the unearned profit of an insurance contract.
It is recognized over the duration of the contract as the insurer provides the
coverage.

3. Impact on Insurance Liabilities

• Under IFRS 4, insurance liabilities were measured using a variety of approaches,

which could include local statutory accounting methods or historical cost
approaches. This led to inconsistencies in the measurement of liabilities across
insurers.
• Under IFRS 17, insurance liabilities are recognized based on the Fulfillment Cash
Flows (FCF), which consist of:
o Estimates of future cash flows: The expected premiums, claims, and
expenses associated with the contract.
o Discounting: The future cash flows are discounted to their present value,
considering the time value of money.
o Risk Adjustment: A new requirement that ensures the liability reflects the
risk associated with the uncertainty of the future cash flows.

Additionally, the Contractual Service Margin (CSM) is recognized at inception,

representing the unearned profit of the insurance contract, and amortized over the

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 life of the contract as the insurer provides services. This ensures that profits are
recognized gradually, reflecting the provision of insurance coverage.

4. Impact on Insurance Assets

• IFRS 17 introduces more detailed reporting of reinsurance contracts.

Reinsurance assets are now reported separately from the underlying insurance
liabilities and must be measured similarly—using current estimates of future cash
flows, discounted for time value, and adjusted for risk.
• Under IFRS 4, reinsurance contracts were often treated inconsistently, with
significant flexibility in their measurement and presentation. Under IFRS 17, the
reinsurance assets are subject to the same measurement principles as the insurance
liabilities, creating more consistency in the reporting of both.

5. Impact on Profits

• Under IFRS 4, insurers had significant discretion in profit recognition, with the
potential for front-loading or delayed recognition of profits based on the chosen
accounting methods (e.g., premium recognition patterns, the use of deferral and
amortization models).
• Under IFRS 17, profit is recognized progressively over the duration of the
insurance contract as the insurer provides coverage. The key elements affecting
profit recognition under IFRS 17 include:
o Revenue recognition: Premiums are recognized as revenue over the
coverage period, reflecting the delivery of insurance services.
o Profit recognition through CSM: The CSM is amortized over time and
adjusts for changes in assumptions related to future cash flows. If the
assumptions change (e.g., for claims or expenses), the CSM is adjusted,
which impacts future profit recognition.
o Increased volatility: Changes in future cash flow assumptions (e.g., claims
or discount rates) lead to adjustments in the CSM, which could result in
increased profit volatility.

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6. Summary of the Impact

Element IFRS 4 IFRS 17

Insurance Flexibility in accounting
Standardized approach, current value method
Contracts treatment
Often based on local Measured at present value of future cash
Liabilities
statutory methods flows, including risk adjustment
Reinsurance assets treated Reinsurance assets measured consistently
Assets
inconsistently with insurance liabilities
Profit Can be front-loaded or Progressive recognition over contract
Recognition delayed duration, adjusted by changes in assumptions
Volatility of Less standardized, can be More predictable but can be volatile due to
Profits irregular changes in assumptions

7. Conclusion

The transition from IFRS 4 to IFRS 17 significantly alters the way insurance contracts are
reported. IFRS 17 introduces a more structured and consistent approach to the
measurement of insurance liabilities, assets, and the recognition of profits. The key changes
include the use of a current value measurement for both insurance contracts and reinsurance
assets, the introduction of the Contractual Service Margin (CSM) to smooth profit
recognition over the life of the contract, and a more systematic approach to profit
recognition. While these changes improve transparency and comparability across the
insurance industry, they also introduce more complexity and potential volatility in financial
reporting, requiring insurers to update their financial systems, actuarial models, and
reporting processes to comply with the new standard.

Comparison of Financial Statements Under IFRS 4 vs. IFRS 17 for a

Hypothetical Insurance Company

This analysis will compare the financial statements of a hypothetical insurance company
before and after transitioning from IFRS 4 (Insurance Contracts) to IFRS 17. The key
areas of comparison will focus on Income Statement, Balance Sheet, and Cash Flow
Statement, highlighting the major differences in how insurance contracts, liabilities,
assets, and profits are reported under each standard.

1. Overview of IFRS 4 and IFRS 17

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 • IFRS 4 (effective from 2005) allowed insurance companies to continue using
national or local accounting policies for insurance contracts, which often led to
inconsistencies in how insurance contracts were reported globally.
• IFRS 17 (effective from 2023) replaced IFRS 4 and introduced a comprehensive
framework for the accounting of insurance contracts. It aims for consistency and
comparability by requiring a uniform approach to the recognition, measurement,
presentation, and disclosure of insurance contracts, focusing on current values and
the gradual recognition of profit over the contract term.

2. Income Statement (Profit or Loss)

The key differences in the income statement between IFRS 4 and IFRS 17 stem from how
insurers recognize revenue and profit from insurance contracts.

Under IFRS 4:

• Revenue Recognition: Revenue from insurance contracts (often premiums) may

be recognized upfront or spread over the coverage period, depending on the
company's accounting policy. Insurers could use deferral and amortization
techniques, which often led to front-loading of revenue.
• Profit Recognition: Profits could be recognized early in the contract, especially if
insurers applied methods like unearned premium reserves (UPR). This could create
volatility and less transparency, as profit recognition might not align with the actual
provision of insurance services.
o Example: An insurance company might recognize a large portion of profit
at the inception of a multi-year policy, even though the insurance coverage
is provided over several years.

Under IFRS 17:

• Revenue Recognition: Revenue (or premiums) is recognized over the coverage

period as the insurance services are provided. This approach is much more aligned
with the delivery of insurance services. The revenue is essentially the release of the
Contractual Service Margin (CSM), a new concept introduced under IFRS 17.
• Profit Recognition: The profit is recognized progressively over the term of the
contract based on the CSM and as the insurance service is delivered. Changes in
assumptions (such as expected claims or expenses) will impact future profit
recognition.
o Example: If the same multi-year policy is written, instead of recognizing all
profit at the beginning, the insurer will recognize a portion of profit each
year over the contract’s life, and any changes in future assumptions will
adjust the remaining profit to be recognized.

Key Differences:

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 • Revenue and profit under IFRS 4 may be front-loaded or unevenly recognized,
leading to potential distortion.
• Under IFRS 17, profit is spread more evenly over the contract period, reflecting
the ongoing insurance service.

3. Balance Sheet (Assets and Liabilities)

Under IFRS 4:

• Insurance Liabilities: Liabilities for insurance contracts were measured using a

range of methods, often reflecting local statutory rules or historical cost. The most
common liability measurement was based on unearned premium reserves (UPR)
or similar techniques, which could lead to liabilities that don't fully reflect the
present value of future obligations.
o Example: A liability of $100 million might be reported at the start of a
contract, reflecting only the unearned premiums, without accounting for
future claims or the time value of money.
• Reinsurance Assets: Often treated inconsistently depending on the jurisdiction,
and sometimes valued at book value rather than fair value.

Under IFRS 17:

• Insurance Liabilities: Insurance contract liabilities are measured at the present

value of future cash flows, considering the expected future premiums, claims, and
expenses, discounted for the time value of money. The Contractual Service
Margin (CSM) is also included in the liability and represents the unearned profit
to be recognized over time.
o Example: If the insurance company writes a 5-year policy with expected
future claims of $20 million, the liability will reflect the discounted present
value of these claims, plus a risk adjustment and the CSM.
• Reinsurance Assets: Reinsurance assets under IFRS 17 are treated consistently
with the insurance liabilities. They are measured at the present value of future
expected cash inflows from reinsurance contracts and are also adjusted for risk and
the time value of money.

Key Differences:

• Under IFRS 17, liabilities more accurately reflect the current value of future
obligations and include risk adjustments and time value considerations. This leads
to a more transparent and up-to-date reflection of the insurer’s obligations.
• IFRS 4 may present liabilities that are understated or fail to reflect the actual
present value of future obligations.

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4. Profit or Loss and Equity Impact Over Time

• Under IFRS 4, profit recognition could result in large swings in equity due to
inconsistent methods of recognizing insurance revenue and profit. For example,
front-loading profit might lead to early recognition of earnings that are not
reflective of ongoing insurance services.
• Under IFRS 17, profits are recognized progressively over the contract’s life, which
leads to more stability in reported earnings. Adjustments to assumptions about
future cash flows (e.g., claims or expenses) will be reflected in the CSM, impacting
future profit recognition rather than current-year profit. This may cause equity to
fluctuate more in response to changes in assumptions but provides a more accurate
picture of the company’s ongoing business.

Key Differences:

• IFRS 17 provides more predictable and consistent profit recognition, while

IFRS 4 might result in more erratic profit recognition patterns, especially if profits
are front-loaded.

5. Cash Flow Statement

The transition to IFRS 17 impacts the classification of cash flows related to insurance
contracts in the cash flow statement.

Under IFRS 4:

• Cash flows from insurance contracts, such as premium receipts and claims
payments, could be classified using a wide range of approaches depending on the
insurer’s accounting practices. Some insurers may have classified premiums as
revenue, while claims payments were typically recognized as expenses.

Under IFRS 17:

• Cash flows related to insurance contracts (e.g., premiums received, claims paid,
and reinsurance recoveries) will continue to be classified within operating
activities. However, the presentation and breakdown of cash flows related to
insurance contracts will be more granular and aligned with the changes in
measurement under IFRS 17.
o Example: Premium receipts may now be split between those related to
existing contracts (liabilities) and new contracts, with the cash flow impact
from the CSM also being shown separately.

Key Differences:

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 • Cash flows under IFRS 17 may be more detailed and reflective of the underlying
measurement and service delivery over time compared to the simpler, less detailed
classification under IFRS 4.

6. Summary of Key Differences in Financial Statements

Aspect Under IFRS 4 Under IFRS 17

Front-loaded, based on
Revenue Recognized over the coverage period
premiums or local accounting
Recognition as service is provided
methods
Profit Often front-loaded or unevenly Recognized progressively, with
Recognition spread adjustments through CSM
Insurance Based on local rules (e.g., UPR, Measured at present value of future
Liabilities statutory methods) cash flows, risk adjustments, and CSM
Consistent with insurance liabilities,
Reinsurance Inconsistent treatment across
based on present value of future
Assets insurers
inflows
May fluctuate due to front- More stable, with profit recognized
Balance Sheet
loading or inconsistent over time; changes in assumptions
(Equity)
reporting impact future CSM
Cash Flow Simple classification based on More detailed, with clearer distinctions
Statement cash inflows/outflows based on CSM and insurance service

7. Conclusion

The transition from IFRS 4 to IFRS 17 brings greater transparency, consistency, and
alignment with the economic substance of insurance contracts. Under IFRS 17, insurers
must recognize revenue and profits more progressively, based on the service provided over
time, and must report liabilities at their current value, reflecting future cash flows, risk, and
time value of money. While this increases the complexity of reporting and introduces
potential volatility in the short term, the result is more accurate and comparable financial
statements that better reflect the performance and financial position of insurance
companies.

Challenges in the Transition from IFRS 4 to IFRS 17 and How Companies

Need to Adapt Their Accounting Systems

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The transition from IFRS 4 to IFRS 17 presents significant challenges for insurance
companies, as it requires fundamental changes in how they measure and report insurance
contracts, liabilities, and profits. These changes affect not only the financial statements but
also the underlying systems, processes, and controls that support accounting and reporting.
Below are the key challenges that companies face during this transition, along with the
necessary adaptations to their accounting systems.

1. Complexity of IFRS 17 Measurement Models

Challenges:

• Multiple Measurement Models: IFRS 17 introduces three different models for

measuring insurance contracts, depending on the contract type:
o General Measurement Model (GMM): The standard approach for most
contracts.
o Premium Allocation Approach (PAA): A simplified model for short-
duration contracts.
o Variable Fee Approach (VFA): Used for contracts with direct
participation features.

Insurers must determine which model applies to each contract and apply the
appropriate measurement techniques. This can be complex for companies with a
diverse portfolio of insurance products.

• Present Value of Future Cash Flows: IFRS 17 requires that insurance contracts
be measured based on the present value of future cash flows, which includes
estimating future premiums, claims, and expenses. This introduces more
complexity, especially for long-duration contracts where cash flow projections are
more uncertain and sensitive to assumptions.

How Companies Need to Adapt:

• Actuarial Models: Insurers must develop or update actuarial models to project

future cash flows, incorporating assumptions about claims, premiums, and discount
rates. This requires significant actuarial expertise and may necessitate new tools
and software.
• Systems Integration: Accounting systems need to integrate with actuarial systems
to gather data on future cash flows, discounting, and risk adjustments. This
integration will ensure accurate and timely calculations of liabilities, the
Contractual Service Margin (CSM), and other key metrics under IFRS 17.
• System Flexibility: Companies should implement flexible accounting software
capable of handling multiple measurement models (GMM, PAA, VFA) and
providing the granularity needed for complex contracts.

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2. Recognition of the Contractual Service Margin (CSM)

Challenges:

• Complex Profit Recognition: Under IFRS 17, insurers must recognize profit over
time based on the CSM, which represents unearned profit. The CSM is adjusted for
changes in future cash flow estimates (e.g., claims, expenses, or premiums). The
need to track changes in assumptions and adjust the CSM accordingly introduces
significant complexity.
• Estimates and Assumptions: Since the CSM is sensitive to changes in
assumptions about future cash flows, insurers need to maintain accurate and up-to-
date data on claims, expenses, and premiums. Errors or delays in updating these
assumptions could lead to incorrect profit recognition.

How Companies Need to Adapt:

• Enhanced Data Management: Companies must establish robust processes to

collect and manage data on all the assumptions that impact the CSM, including
claims experience, expense assumptions, and discount rates.
• System Capabilities: Accounting systems need to be capable of calculating,
tracking, and adjusting the CSM over time, including handling the impact of
changes in assumptions. This could require significant upgrades to existing systems
or the implementation of new actuarial and accounting software solutions.
• Audit and Control: With the increased complexity of CSM adjustments, insurers
will need to strengthen their internal controls to ensure accurate and consistent
application of IFRS 17 rules. This will likely involve greater collaboration between
actuarial teams and finance teams.

3. Data and Systems Integration

Challenges:

• Fragmented Data Sources: Under IFRS 17, insurers need to integrate data from
multiple sources (e.g., actuarial, claims, underwriting, finance, and reinsurance
systems). This can be challenging for companies that rely on disparate legacy
systems.
• Data Granularity: IFRS 17 requires data at a more granular level, such as contract-
specific details, cash flow projections, and adjustments for risk. Companies with
legacy systems may struggle to capture and store the necessary data.
• Historical Data: IFRS 17 also requires insurers to track and store historical data to
adjust the CSM and make future adjustments based on changes in assumptions.

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 This can be particularly challenging for companies that have not previously stored
sufficient historical data.

How Companies Need to Adapt:

• Data Centralization: Insurers will need to invest in centralizing their data,

ensuring that all relevant information (e.g., policy details, claims data, assumptions)
is available in one system. This may involve consolidating or replacing legacy
systems with integrated solutions that allow for real-time data access and updates.
• Data Quality and Governance: Companies should implement robust data
governance frameworks to ensure that the data used for IFRS 17 reporting is
accurate, complete, and timely. This includes establishing clear processes for data
validation, reconciliation, and review.
• Automation and Technology: To handle the increased volume of data and
calculations required under IFRS 17, insurers should look for opportunities to
automate processes and integrate new technologies (e.g., advanced analytics, AI-
driven forecasting) to improve efficiency and accuracy.

4. System Capacity for Increased Reporting and Disclosure Requirements

Challenges:

• Increased Disclosure Requirements: IFRS 17 requires more detailed disclosures

than IFRS 4, including information about the CSM, risk adjustments, insurance
liabilities, and cash flows. This means that insurers will need to present much more
granular and complex information in their financial statements and accompanying
notes.
• Time-Consuming Reporting Process: The detailed tracking of future cash flows,
CSM adjustments, and risk adjustments under IFRS 17 will increase the time and
resources required to prepare financial statements, especially during the transition
period.

How Companies Need to Adapt:

• Enhanced Reporting Tools: Companies will need to upgrade their reporting tools
to handle the increased complexity of IFRS 17. This could involve integrating
reporting software with actuarial and accounting systems to automate the
generation of detailed reports and disclosures.
• Dedicated Teams and Resources: Given the complexity of the new reporting
requirements, companies should consider creating dedicated teams focused on
IFRS 17 implementation and reporting. This could involve expanding actuarial and
finance teams or hiring external consultants to help manage the transition.

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5. Cultural and Organizational Changes

Challenges:

• Cross-Department Collaboration: The implementation of IFRS 17 requires

collaboration between multiple departments—actuarial, finance, IT, risk, and legal
teams. The need to align data, assumptions, and reporting processes can create
coordination challenges.
• Training and Expertise: Staff across various departments will need extensive
training on the new standard. Actuarial and finance teams will need to acquire a
deeper understanding of the new models (GMM, PAA, VFA) and how to apply
them.

How Companies Need to Adapt:

• Cross-Functional Teams: Insurers should form cross-functional teams to manage

the transition. This will help ensure alignment across departments and that all
stakeholders (actuarial, finance, IT, risk) understand and can apply IFRS 17
requirements.
• Training Programs: Companies must invest in training programs for their staff to
ensure they are equipped with the knowledge and skills to work with the new
standards. This includes training on the technical aspects of IFRS 17 and on the
new tools and systems being implemented.
• Change Management: Given the scale of change, effective change management
strategies are essential. Insurers will need to communicate the purpose and benefits
of IFRS 17, foster buy-in from key stakeholders, and manage the organizational
impact of the transition.

Conclusion: Adapting to IFRS 17

The transition from IFRS 4 to IFRS 17 represents a significant shift in the way insurers
report their financial position and performance. The complexity of IFRS 17, particularly
around the measurement of insurance contracts, recognition of the Contractual Service
Margin (CSM), and the increased disclosure requirements, presents considerable
challenges. To meet these challenges, insurance companies must adapt by enhancing their
data management systems, integrating actuarial and accounting platforms, investing in
automation and reporting tools, and fostering collaboration across departments.
Additionally, effective training, change management, and increased resources are crucial
to ensure a smooth transition. By making these adjustments, companies can comply with
IFRS 17 while maintaining accurate, transparent, and comparable financial reporting.

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Written Report on the Main Provisions of IFRS 17 and Its Implications

1. Introduction

IFRS 17 (Insurance Contracts), which came into effect on January 1, 2023, is a landmark
standard issued by the International Accounting Standards Board (IASB) to replace IFRS
4 (Insurance Contracts). IFRS 17 introduces a comprehensive framework for the
recognition, measurement, presentation, and disclosure of insurance contracts. The primary
objective of the standard is to improve the consistency and comparability of financial
reporting across the insurance industry, providing users of financial statements with more
transparent and reliable information about an insurer's financial position and performance.
This report outlines the main provisions of IFRS 17 and discusses the key implications for
insurance companies, including the impact on financial statements, accounting systems,
and business processes.

2. Main Provisions of IFRS 17

2.1 Scope of IFRS 17

IFRS 17 applies to all types of insurance contracts, including life insurance, non-life
(general) insurance, and reinsurance contracts. The standard covers both direct insurance
contracts (issued by the insurer) and reinsurance contracts (purchased by the insurer). It
excludes certain contracts, such as warranties, product guarantees, and some investment-
related contracts. The standard also applies to mutual insurance arrangements and self-
insured companies.

2.2 Measurement Models

IFRS 17 introduces three different measurement models for insurance contracts:

1. General Measurement Model (GMM): The default model used for most
insurance contracts, under which insurance liabilities are calculated based on the
present value of future cash flows, adjusted for risk, and including a Contractual
Service Margin (CSM). The CSM represents the unearned profit from the contract
and is amortized over the life of the policy.
2. Premium Allocation Approach (PAA): A simplified model available for short-
duration contracts, such as property and casualty insurance, where the measurement
is based on the unearned premiums and is typically a simplified version of the
GMM. It is intended to reduce the complexity for contracts where the duration is
short and the cash flow pattern is predictable.
3. Variable Fee Approach (VFA): This model is applied to contracts with direct
participation features, such as some life insurance products where the policyholder
shares in the investment returns. The VFA adjusts the CSM based on the changes
in the fair value of the underlying items that the policyholder participates in.

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2.3 Recognition of Revenue and Profit

Under IFRS 17, insurance revenue and profit are recognized progressively over the life of
the contract as the insurance service is provided. This differs significantly from the
recognition methods allowed under IFRS 4, where insurers often had significant discretion
in how they recognized revenue and profit. IFRS 17 requires insurers to recognize revenue
over the coverage period and match it with the insurance service provided during that time.

• Insurance revenue: Represented by the release of the CSM over the life of the contract
as the insurer provides insurance coverage.
• Insurance service expense: Includes claims, benefits paid, and expenses incurred during
the coverage period.

2.4 Liabilities and the Contractual Service Margin (CSM)

The insurance contract liability is calculated as the present value of future cash flows,
including:

• Estimates of future premiums, claims, and expenses

• Discounting for the time value of money
• Risk adjustment to reflect the uncertainty in the future cash flows
• The CSM, which represents unearned profit to be recognized over time.

The CSM is a key concept in IFRS 17, as it ensures that profit is only recognized when the
insurance coverage is provided, aligning the recognition of profit with the actual service
provided to policyholders. The CSM is adjusted for changes in assumptions related to
future cash flows, which can result in the deferral or acceleration of profit recognition.

2.5 Reinsurance Contracts

Reinsurance contracts are treated separately from the underlying insurance contracts. IFRS
17 requires reinsurance assets to be measured using the same principles as insurance
liabilities, including the present value of future cash inflows, discounting, and risk
adjustment. Additionally, the reinsurance CSM will be calculated and amortized in a
similar manner to the insurance CSM.

2.6 Disclosure Requirements

IFRS 17 introduces extensive and detailed disclosure requirements aimed at providing

transparency and comparability. Insurers must disclose:

• Information about the liabilities and assets related to insurance contracts, including the
CSM, risk adjustment, and the changes in these items over the reporting period.
• Profit or loss recognized during the period, including a breakdown of revenue, expenses,
and the amortization of the CSM.

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 • The nature of insurance contracts, including the effect of changes in assumptions,
significant judgments made by management, and the impact of reinsurance
arrangements.

These disclosures are intended to help users of financial statements understand the insurer’s
performance, financial position, and risks.

3. Implications of IFRS 17 for Insurance Companies

3.1 Impact on Financial Statements

• Balance Sheet: Under IFRS 17, insurance liabilities will be measured at the present
value of future cash flows, including the risk adjustment and CSM. This may result
in higher or more volatile liabilities compared to the traditional methods used under
IFRS 4, particularly for long-duration contracts. The inclusion of the CSM will
result in more transparent and systematic profit recognition, which will impact the
reported equity and the timing of profit recognition.
• Income Statement: Profit recognition will be more gradual, reflecting the
provision of insurance coverage over the life of the contract. Insurers will recognize
insurance revenue and expenses over time, based on the release of the CSM, rather
than front-loading profits. This may lead to smoother earnings and reduced
volatility in profit recognition, which can provide a clearer picture of the insurer's
ongoing profitability.
• Cash Flow Statement: Cash flows will generally be reported in the operating
section, reflecting premiums received, claims paid, and other related cash
movements. The presentation may be more detailed under IFRS 17, reflecting the
changes in the measurement of insurance liabilities and the CSM.

3.2 Operational Implications

• System Changes: The transition to IFRS 17 will require insurers to overhaul or

upgrade their accounting and actuarial systems. Insurers must adopt systems
capable of handling the complex calculations involved in IFRS 17, including the
measurement of the present value of future cash flows, the tracking of the CSM,
and the necessary disclosures. This may require substantial investments in IT
infrastructure, including the integration of actuarial models with financial reporting
systems.
• Data Management: To meet the requirements of IFRS 17, insurers will need to
improve data collection and management practices. This includes ensuring the
availability of accurate data on assumptions (e.g., claims, expenses, premiums), as
well as historical data needed to track changes in the CSM over time. Companies
may need to implement new data governance frameworks to ensure data
consistency and accuracy.

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 • Actuarial and Finance Collaboration: The implementation of IFRS 17 will
require close collaboration between actuarial teams, finance departments, and IT
teams. Actuaries will play a critical role in developing the assumptions and
projections needed to calculate the present value of future cash flows, while finance
teams will need to ensure that the recognition of revenue and profit aligns with the
insurance service provided.

3.3 Impact on Business Performance and Strategy

• Profit Volatility: Under IFRS 17, the recognition of profit is closely tied to the
provision of insurance services, with the CSM being adjusted for changes in
assumptions. As a result, changes in key assumptions—such as claims experience,
discount rates, or future premiums—can cause significant volatility in the CSM
and, consequently, in reported profits. Insurers will need to manage this volatility
by developing robust forecasting models and risk management strategies.
• Capital Management: The new measurement approach under IFRS 17 may impact
an insurer's capital position, as liabilities will be more reflective of the present value
of future obligations. This could affect the company’s solvency position and capital
requirements. Insurers may need to adapt their capital management strategies and
engage in more frequent stress testing and scenario analysis.
• Product Design and Pricing: The introduction of IFRS 17 could influence
insurers’ product design and pricing strategies. For instance, products with high
upfront profit recognition may need to be restructured to align with the more
gradual profit recognition model under IFRS 17. Similarly, insurers may need to
reconsider how they structure long-term contracts and the associated risk
adjustments.

4. Conclusion

IFRS 17 represents a significant shift in the way insurance companies measure and report
insurance contracts. By introducing standardized and more transparent measurement and
recognition principles, IFRS 17 enhances comparability and consistency in financial
reporting. However, the standard also poses considerable challenges, including the need
for upgrades to accounting systems, changes in actuarial models, and improvements in data
management practices.

The most notable implications of IFRS 17 are the introduction of the Contractual Service
Margin (CSM), which aligns profit recognition with the provision of insurance services,
and the requirement for insurers to recognize liabilities based on the present value of future
cash flows. While the transition will require substantial effort and investment, the long-
term benefits of enhanced transparency, improved risk management, and more consistent
profit recognition are expected to outweigh the challenges. Insurers must take a proactive
approach to ensure they are fully prepared for the requirements of IFRS 17, as the

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successful implementation of the standard will have a significant impact on their financial
reporting, operational processes, and strategic decision-making.

Presentation: Key Changes and Challenges in the Transition from IFRS 4

to IFRS 17

1. Introduction to IFRS 17

• Objective: Replace IFRS 4 to enhance consistency, transparency, and

comparability in the accounting of insurance contracts.
• Effective Date: January 1, 2023.
• Focus: Standardizes the measurement, recognition, and disclosure of insurance
contracts across insurers globally.

2. Key Changes Under IFRS 17

2.1 Measurement Models

• General Measurement Model (GMM): Default for most contracts; uses present
value of future cash flows + risk adjustment + Contractual Service Margin (CSM).
• Premium Allocation Approach (PAA): Simplified model for short-duration
contracts (e.g., property, casualty).
• Variable Fee Approach (VFA): Used for contracts with direct participation
features (e.g., life insurance with investment returns).

2.2 Contractual Service Margin (CSM)

• CSM: Represents unearned profit. Amortized over the coverage period as

insurance services are provided.

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 • Impact: Profit is recognized progressively rather than front-loaded, aligning profit
recognition with the provision of insurance coverage.

2.3 Profit & Revenue Recognition

• Revenue: Recognized over the coverage period, reflecting the provision of

insurance services.
• Profit: Recognized gradually over the life of the contract, based on changes in
future cash flows and the release of the CSM.

2.4 Reinsurance Contracts

• Reinsurance is treated similarly to direct insurance contracts: measured at the

present value of future cash flows, with a separate CSM for reinsurance.

2.5 Disclosure Requirements

• Enhanced Transparency: Detailed disclosures about CSM, risk adjustments,

contract liabilities, and changes in these items over time.
• Detailed Financial Reporting: Requires more granular information on
performance, liabilities, and assumptions (e.g., claims, premiums, expenses).

3. Key Challenges in Transition

3.1 Complexity of Measurement Models

• Need to apply different models (GMM, PAA, VFA) depending on the contract type.
• Calculation of the present value of future cash flows, risk adjustments, and CSM is
complex, especially for long-term contracts.

3.2 System and Data Challenges

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 • System Upgrades: Existing IT infrastructure may not be capable of handling the
complexity of IFRS 17. Insurers will need to upgrade actuarial, financial, and
reporting systems.
• Data Management: Accurate, up-to-date data on assumptions (claims, premiums,
expenses) is crucial for IFRS 17 calculations. This requires improved data
governance and integration across departments.

3.3 Impact on Profit and Loss Reporting

• Gradual profit recognition might lead to volatility in reported profits, especially if

assumptions about future cash flows change (e.g., claims experience, discount
rates).
• Risk of Profit Volatility: Changes in estimates can lead to adjustments in the CSM,
affecting reported earnings.

3.4 Operational Implications

• Cross-Functional Collaboration: Requires stronger collaboration between

actuarial, finance, and IT teams to ensure accurate reporting and compliance.
• Training and Expertise: Staff must be trained on IFRS 17 principles, and new
processes must be implemented to handle the complexities of the new standard.

3.5 Extensive Disclosure Requirements

• Increased reporting complexity, requiring additional time and resources to gather

and disclose information.
• The need for robust internal controls and audit trails to ensure the accuracy of the
information disclosed.

4. Implications for Insurance Companies

4.1 Financial Statement Impact

• Balance Sheet: More accurate liabilities reflecting the present value of future cash
flows and the inclusion of the CSM.

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 • Income Statement: More consistent and transparent recognition of revenue and
profit over the life of contracts.
• Cash Flow Statement: Increased granularity in cash flow reporting, particularly
for insurance services.

4.2 Operational Changes

• Significant investments in IT and data management systems are needed to handle

the complexity of IFRS 17.
• Actuarial and finance teams will need to collaborate closely to ensure that all
assumptions are accurate and up-to-date.

4.3 Capital Management and Strategy

• IFRS 17 may affect capital requirements due to the change in how liabilities are
measured and profit is recognized.
• Insurers will need to assess how the new standard affects their risk exposure and
capital management strategy.

5. Conclusion

• IFRS 17 introduces a more transparent and standardized approach to insurance

contract accounting, with a focus on aligning profit recognition with the service
provided over time.
• The transition will be challenging but is crucial for improving comparability and
reliability in financial reporting.
• Insurers need to invest in systems, data management, and cross-functional
collaboration to meet the new requirements and ensure a smooth transition.

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