Actuarial Notes

IFRS 17

Study guide: Exam 6C

IFRS 17 Insurance Contracts is the accounting standard, effective in Canada from 1 January 2023, that governs how insurers measure and present insurance contracts. It replaced IFRS 4 — under which each country kept its legacy practice — with a single current-value measurement model, and it is the framework behind every number in a Canadian P&C insurer's modern financial statements.

\text{Insurance Contract Liability} = \text{LRC} + \text{LIC}

  • The two liabilities. The Liability for Remaining Coverage (LRC) covers future service under contracts already written; the Liability for Incurred Claims (LIC) covers claims that have already occurred. The old "unearned premium plus claims reserves" split maps onto this, but the measurement is different.
  • Three measurement models. The General Measurement Model (GMM, or building block approach) is the default; the Premium Allocation Approach (PAA) is a permitted simplification for short-duration contracts, which is what most Canadian P&C business uses; and the variable fee approach applies to direct participating contracts, which P&C insurers do not write.
  • What changed for P&C insurers, in the order of impact:
    • Discounting is mandatory. Claim liabilities are measured at present value using current rates — under the old Canadian regime discounting with a provision for adverse deviations was already practice, so the change here was less dramatic than for many jurisdictions.
    • Risk adjustment replaces margins for adverse deviations, and its confidence level must be disclosed — an entity-specific measure of compensation for bearing uncertainty rather than a prescribed margin.
    • Groups of contracts are defined by portfolio, annual cohort and profitability, and onerous contracts are recognised as a loss immediately.
    • Reinsurance Contracts Held are measured separately as assets, never netted against the underlying liabilities.
    • Insurance Revenue replaces written and earned premium on the face of the income statement, and deposit components are excluded.
  • Presentation changes too: an Insurance Service Result separated from Insurance Finance Income or Expenses, with an accounting policy choice to present some finance effects in OCI.
  • The Canadian layer sits on top: the Canadian Institute of Actuaries (CIA) issued the Standards of Practice and educational notes that determine how IFRS 17 is applied in practice here, and OSFI rebuilt the MCT and the Canadian Annual Return around it.

Mapping the Old Balance Sheet to the New A P&C insurer's pre-transition balance sheet showed: unearned premium \$120 million, deferred acquisition costs \$28 million, unpaid claims (discounted, including PfADs) \$340 million, and reinsurance recoverable \$60 million netted within unpaid claims.

Describe the IFRS 17 presentation.

Answer Liability for remaining coverage. Under the PAA, the LRC begins from unearned premium less any acquisition cash flows deferred against it:

\$120\text{M} - \$28\text{M} = \$92\text{M}

The DAC asset disappears as a separate line — it is now inside the LRC. If any group is onerous, a Loss Component is added on top.

Liability for incurred claims. The \$340 million is remeasured: present value of fulfilment cash flows at current discount rates, plus a risk adjustment in place of the PfADs — a different quantity with a disclosed confidence level.

Reinsurance. The \$60 million comes out of the liability and onto the asset side as a separate Reinsurance Contracts Held asset, with its own risk adjustment and its own non-performance risk allowance. Gross-up is mandatory; netting is not permitted.

Net effect on equity depends on whether the risk adjustment is larger or smaller than the PfADs it replaced, and on the current discount rate versus the previous one — which is why transition disclosure exists and why two insurers with identical business could report different equity.