Insurance Service Expenses

Study guide: Exam 6C

Insurance Service Expenses are the IFRS 17 costs of providing insurance coverage in the period: claims and other expenses incurred, amortisation of acquisition cash flows, losses on onerous groups and reversals of them, and changes to the LIC relating to past service. They sit directly beneath Insurance Revenue and together produce the Insurance Service Result.

• What is in: incurred claims and ALAE, directly attributable claims-handling costs, amortised acquisition cash flows, the loss recognised on onerous groups, and adverse or favourable development on claims already incurred.
• What is deliberately out: the unwinding of discount and the effect of changes in discount rates, which are Insurance Finance Income or Expenses. This separation is the design feature that makes the insurance service result a clean measure of underwriting performance, undisturbed by interest rate movements.
• Also out: general overhead not directly attributable to fulfilling contracts, which is expensed as an operating cost outside the insurance service result entirely.
• Past service versus future service is the routing rule to memorise. A change in the estimate of claims already incurred goes here, in profit or loss now. A change in the estimate of claims not yet incurred adjusts the CSM under the GMM, or triggers an onerous assessment under the PAA.
• The Loss Component offsets. For an onerous group, incurred claims are reduced by the loss component released, so the expense reported is less than the claims incurred — because the difference was charged at inception.
• Reinsurance recoveries do not reduce insurance service expenses; they appear in the separate net expense from reinsurance held.

Routing Each Change For each item, state where it appears in the IFRS 17 income statement.

1. Claims incurred on accidents occurring this year: \$210 million.

2. Adverse development of \$18 million on claims incurred in prior years.

3. Unwinding of discount on the LIC: \$9 million.

4. A fall in the discount rate increasing the LIC by \$14 million.

5. A revised estimate of claims on the unexpired portion of a GMM group: +\$7 million.

6. Amortisation of acquisition cash flows: \$46 million.

Answer

• 1. Insurance service expenses, \$210M. Current-period claims.
• 2. Insurance service expenses, \$18M. Adverse development relates to past service and is recognised immediately — it does not touch the CSM.
• 3. Insurance finance expenses, \$9M. Time value of money, not underwriting.
• 4. Insurance finance expenses, \$14M — or OCI, if the insurer has elected the OCI option for that portfolio.
• 5. Adjusts the CSM, not profit or loss, because it relates to future service. If the CSM is insufficient to absorb it, the excess becomes a loss and a Loss Component.
• 6. Insurance service expenses, \$46M — unless the insurer elected the PAA expedient to expense acquisition cash flows as incurred, in which case they were charged when paid.

Insurance service expenses total \$274 million; \$23 million goes to finance expenses (or OCI); \$7 million goes nowhere on the income statement this period.

The discipline being tested is a single question asked of every item: does this relate to service already provided, service not yet provided, or the time value of money? Those three destinations account for everything.