Applying IFRS 17: A closer look at the new Insurance Contracts Standard

By EY · EYGM Limited · 2021 · EYG No. 005427-21Gbl

Study guide: Exam 6I

EY's guide to IFRS 17 Insurance Contracts, the IASB's comprehensive accounting standard for insurance contracts issued in May 2017 and amended in June 2020, in its June 2021 edition. It works through the standard's objective, definitions and scope, the definition of an insurance contract, level of aggregation, recognition, the general model, the premium allocation approach, reinsurance contracts held, participating contracts, modification and derecognition, presentation, disclosure and transition.

On the syllabus

Exam 6I — objectives C1–C4, D4–D5; Chapters 1, 3, 6, 7, 8, 9.1–9.9, 10, 11, 15 and 16, from the paper archived on the CAS website

Introduction

The IASB issued IFRS 17 Insurance Contracts in May 2017 and amended it in June 2020; it is effective for annual periods beginning on or after 1 January 2023, and supersedes IFRS 4, an interim standard that allowed a wide variety of accounting practices.
The standard applies a current value approach to measuring insurance contracts, recognises profit as insurers provide services, and reports underwriting results separately from financing activities.

1 Overview of IFRS 17

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts held and investment contracts with discretionary participation features.
It combines current measurement of future cash flows with recognition of profit over the period services are provided, presents insurance service results separately from insurance finance income or expenses, and requires a policy choice whether to recognise all insurance finance income or expense in profit or loss or some in other comprehensive income.

2 The objective, definitions and scope of IFRS 17

2.1 The objective of IFRS 17
2.2 Definitions
2.3 Scope
- 2.3.1 Transactions not within the scope of IFRS 17
  - 2.3.1.A Product warranties
  - 2.3.1.B Financial guarantee contracts
  - 2.3.1.C Direct insurance contracts in which the entity is the policyholder
  - 2.3.1.D Credit card contracts (or similar contracts) that provide insurance coverage
- 2.3.2 Fixed-fee service contracts
- 2.3.3 Loan contracts that transfer significant insurance risk only on settlement of the policyholder’s obligation created by the contract
- 2.3.4 Other accounting standards which affect insurers

3 The definition of an insurance contract

3.1 The definition
3.2 Uncertain future events
3.3 Payments in kind
3.4 The distinction between insurance risk and financial risk
- 3.4.1 Insurable interest
- 3.4.2 Lapse, persistency and expense risk
- 3.4.3 Insurance of non-insurance risks
3.5 Significant insurance risk
- 3.5.1 Quantity of insurance risk
- 3.5.2 The level at which significant insurance risk is assessed
  - 3.5.2.A Self insurance
  - 3.5.2.B A mutual insurer
  - 3.5.2.C Intragroup insurance contracts
- 3.5.3 Significant additional amounts
3.6 Changes in the level of insurance risk
3.7 Examples of insurance and non-insurance contracts
- 3.7.1 Examples of insurance contracts
- 3.7.2 Examples of transactions that are not insurance contracts

4 Combining insurance contracts

5 Separating components from an insurance contract

5.1 Separating embedded derivatives from an insurance contract
5.2 Separating investment components from an insurance contract
- 5.2.1 The definition of an investment component
- 5.2.2 Separable investment components
- 5.2.3 Measurement of the non-distinct investment component
5.3 Goods and other than insurance contract services

6 Level of aggregation

6.1 Identifying portfolios
- 6.1.1 Separation of insurance components within an insurance contract
6.2 Groups of insurance contracts
- 6.2.1 Identifying groups based on profitability
- 6.2.2 ‘Annual cohorts’
  - 6.2.2.A Contracts with intergenerational sharing of risks
6.3 Identifying groups for contracts applying the premium allocation approach

7 Initial recognition

7.1 Initial recognition of insurance and reinsurance contracts issued
7.2 Initial recognition of reinsurance contracts held
7.3 Initial recognition of insurance acquisition cash flows
7.4 Initial recognition of investment contracts with discretionary participation features

8 Measurement — overview

8.1 Overview of the general model
8.2 Modification to the general model
8.3 Insurance contracts in a foreign currency

9 Measurement – General Model

9.1 The contract boundary
- 9.1.1 Options to add insurance coverage
- 9.1.2 Constraints or limitations relevant in assessing repricing
- 9.1.3 Contract boundary matters related to insurance acquisition cash flows
9.2 Estimates of expected future cash flows
- 9.2.1 Market variables and non-market variables
  - 9.2.1.A Market variables
  - 9.2.1.B Non-market variables
- 9.2.2 Using current estimates
- 9.2.3 Cash flows within the contract boundary
  - 9.2.3.A Premium cash flows
  - 9.2.3.B Payments to (or on behalf of) a policyholder
  - 9.2.3.C Payments to (or on behalf of) a policyholder that vary depending on returns on underlying items
  - 9.2.3.D Payments to (or on behalf of) a policyholder resulting from derivatives
  - 9.2.3.E Insurance acquisition cash flows
  - 9.2.3.F Claims handling costs
  - 9.2.3.G Costs incurred in providing contractual benefits in kind
  - 9.2.3.H Policy administration and maintenance costs
  - 9.2.3.I Transaction-based taxes
  - 9.2.3.J Payments by the insurer in a fiduciary capacity
  - 9.2.3.K Potential inflows from recoveries
  - 9.2.3.L An allocation of fixed and variable overheads
  - 9.2.3.M Costs incurred in providing investment activity, investment- return and investment-related services
  - 9.2.3.N Any other costs
- 9.2.4 Cash flows excluded from the contract boundary
9.3 Discount rates
- 9.3.1 Discount rates consistent with characteristics of cash flows
- 9.3.2 Current discount rates consistent with observable market prices
- 9.3.3 ‘Bottom-up’ or ‘top-down’ approach
9.4 Risk adjustment for non-financial risks
- 9.4.1 Techniques used to estimate the risk adjustment for non-financial risk
- 9.4.2 Presentation of the risk adjustment for non-financial risk in the statement of comprehensive income
9.5 Contractual service margin
- 9.5.1 Initial recognition
9.6 Subsequent measurement
- 9.6.1 The liability for remaining coverage
- 9.6.2 The liability for incurred claims
- 9.6.3 Subsequent measurement of the contractual service margin (for insurance contracts without direct participation features)
9.7 Allocation of the contractual service margin to profit or loss
- 9.7.1 Allocating the contractual service margin on the basis of coverage units determined by considering both insurance coverage and any investment return service
9.8 Onerous contracts
9.9 Reinsurance contracts issued
- 9.9.1 The contract boundary of a reinsurance contract issued
- 9.9.2 Issued adverse loss development covers
- 9.9.3 Accounting for ceding commissions and reinstatement premiums
- 9.9.4 Determining the quantity of benefits for identifying coverage units
9.10 Impairment of assets recognised for insurance acquisition cash flows
9.11 Insurance contracts issued by mutual entities
9.12 Other matters
- 9.12.1 Impairment of insurance receivables
- 9.12.2 Policyholder loans

10 Premium allocation approach

10.1 Criteria for use of the premium allocation approach
- 10.1.1 Main sources of difference between the premium allocation approach and the general approach
  - 10.1.1.A Changing expectations of profitability for the period of remaining coverage
  - 10.1.1.B Changing interest rates
  - 10.1.1.C Uneven revenue recognition patterns
- 10.1.2 Applying materiality for the premium allocation approach eligibility assessment
10.2 Elections under the premium allocation approach
10.3 Measurement of the liability for remaining coverage on initial recognition
10.4 Subsequent measurement – liability for remaining coverage
10.5 Subsequent measurement – liability for incurred claims

11 Reinsurance contracts held

11.1 Level of aggregation
11.2 The boundary of a reinsurance contract held
11.3 Recognition
11.4 Measurement - initial recognition
- 11.4.1 Initial measurement – fulfilment cash flows
- 11.4.2 Measurement at initial recognition – contractual service margin
- 11.4.3 Initial measurement of reinsurance held of underlying insurance contracts that are onerous at initial recognition
- 11.4.4 Initial measurement of the effect of the risk of non-performance
11.5 Subsequent measurement of reinsurance contracts held
- 11.5.1 Changes to the contractual service margin that result from changes in estimates of cash flows
  - 11.5.1.A Subsequent measurement of non-performance risk
  - 11.5.1.B Subsequent measurement of a loss-recovery component
- 11.5.2 Allocation of the contractual service margin to profit or loss
  - 11.5.2.A Retroactive reinsurance
11.6 Premium allocation approach for reinsurance contracts held
11.7 Reinsurance contracts held and the variable fee approach

12 Measurement of contracts with participation features

12.1 Contracts with cash flows that affect or are affected by cash flows to policyholders of other contracts (mutualisation)
12.2 Participating insurance contracts without direct participation features
12.3 Contracts with direct participation features
- 12.3.1 Definition of an insurance contract with direct participation features
  - 12.3.1.A A share of a clearly defined pool of underlying items
  - 12.3.1.B A substantial share of the fair value returns on the underlying items
  - 12.3.1.C A substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items
- 12.3.2 Measurement of the risk adjustment for non-financial risk using the variable fee approach
- 12.3.3 Measurement of the contractual service margin using the variable fee approach
- 12.3.4 Allocation of the contractual service margin to profit or loss
- 12.3.5 Risk mitigation
- 12.3.6 Disaggregation of insurance finance income or expenses between profit or loss and other comprehensive income
12.4 Investment contracts with discretionary participation features
- 12.4.1 Contracts with switching features

13 Contract modification and derecognition

13.1 Modifications of insurance contracts
13.2 Derecognition of insurance contracts
13.3 Accounting for derecognition
- 13.3.1 Derecognition resulting from extinguishment
- 13.3.2 Derecognition resulting from transfer
- 13.3.3 Derecognition resulting from modification
- 13.3.4 Reclassification adjustments arising from derecognition
- 13.3.5 Contracts applying the premium allocation approach that are derecognised
13.4 Derecognition of assets for insurance acquisition cash flows paid before the related group of insurance contracts is recognised as an asset

14 Acquisition of insurance contracts

14.1 Assets for insurance acquisition cash flows acquired in a business combination within the scope of IFRS 3 or a transfer
14.2 Subsequent treatment of contracts acquired in their settlement period
14.3 Business combinations under common control
14.4 Portfolio transfers- practical issues
- 14.4.1 The difference between a business combination and a transfer
- 14.4.2 Deferred taxation
- 14.4.3 Customer lists and relationships not connected to insurance contracts

15 Presentation

15.1 Statement of financial position
15.2 Statement of financial performance
- 15.2.1 Insurance revenue
  - 15.2.1.A Insurance revenue related to the provision of services in a period
  - 15.2.1.B Revenue under the premium allocation approach
  - 15.2.1.C Income or expense from reinsurance contracts held
- 15.2.2 Insurance service expense
15.3 Insurance finance income or expenses
- 15.3.1 Presentation of insurance finance income or expenses in the statement of comprehensive income
- 15.3.2 Allocating insurance finance income or expenses for contracts except those with direct participation features for which the entity does not hold the underlying items
  - 15.3.2.A Allocating insurance finance income or expenses for contracts for which changes that relate to financial risk do not have a substantial effect on the amounts paid to the policyholder
  - 15.3.2.B Allocating insurance finance income or expense for contracts for which changes in assumptions that relate to financial risk have a substantial effect on amounts paid to policyholders
- 15.3.3 Allocating insurance finance income or expenses for incurred claims when applying the premium allocation approach
- 15.3.4 Allocating finance income or expenses for insurance contracts with direct participation features for which the entity holds the underlying items
15.4 Reporting the contractual service margin in interim financial statements

16 Disclosure

16.1 Explanation of recognised amounts
- 16.1.1 Reconciliations required for contracts applying the general model
- 16.1.2 Information about contracts to which the entity applies the premium allocation approach
  - 16.1.2.A Accounting policies adopted for contracts applying the premium allocation approach
  - 16.1.2.B Reconciliations required for contracts applying the premium allocation approach
- 16.1.3 Explanation of the total amount of insurance finance income or expenses in each reporting period
16.2 Transition amounts
16.3 Significant judgements made in applying IFRS 17
16.4 Disclosure of accounting policies
16.5 Disclosure about the nature and extent of risks
- 16.5.1 Concentrations of risk
- 16.5.2 Insurance and market risks – sensitivity analysis
- 16.5.3 Insurance risk – claims development
- 16.5.4 Credit risk – other information
- 16.5.5 Liquidity risk – other information
- 16.5.6 Regulatory disclosures
- 16.5.7 Disclosures required by IFRS 7 and IFRS 13
- 16.5.8 Key performance indicators

17 Effective date and transition

17.1 Effective date
17.2 Transition – general requirements
- 17.2.1 Transitional relief and prohibition – all entities
  - 17.2.1.A Disclosure relief
  - 17.2.1.B Prohibition from applying the risk mitigation prior to the transition date
  - 17.2.1.C Business combinations within the scope of IFRS 3
- 17.2.2 Disclosures about the effect of transition
17.3 Retrospective application of transition
17.4 Modified retrospective approach
- 17.4.1 Assessments at inception or initial recognition
- 17.4.2 Determining the contractual service margin or loss component for groups of insurance contracts without direct participation features
- 17.4.3 Determining the contractual service margin or loss component for groups of insurance contracts with direct participation features
- 17.4.4 Insurance finance income or expenses
  - 17.4.4.A Groups of insurance contracts that include contracts issued more than one year apart
  - 17.4.4.B Groups of insurance contracts that do not include contracts issued more than one year apart
17.5 Fair value approach
- 17.5.1 Disaggregated insurance finance income or expenses using the fair value approach
- 17.5.2 Asset for insurance acquisition cash flows using the fair value approach
17.6 Redesignation of financial assets and financial liabilities – when IFRS 9 has been applied previously
- 17.6.1 Redesignation of financial assets
- 17.6.2 Redesignation of financial liabilities
17.7 Entities that have not previously applied IFRS 9

Appendix A: IFRS 17 - Defined terms

Appendix B: Contacts list

Sources

Applying IFRS 17: A closer look at the new Insurance Contracts Standard, June 2021 (EY) — the document: title and date (June 2021) from the cover, the table of contents (chapter, section and sub-section numbers and titles, checked against the chapter headings in the text), the text of the Introduction and Chapter 1, and the imprint (© 2021 EYGM Limited, EYG No. 005427-21Gbl) (sha256 7725d88a25f15d8e…); the publication credits no author, and the divisions are headings only
CAS Exam 6I Content Outline, Fall 2026 — the citation ("EY, 'Applying IFRS 17,' 2021"), the note to use the paper archived on the CAS website, and the assignment (objectives C1–C4, D4–D5; Chapters 1, 3, 6, 7, 8, 9.1–9.9, 10, 11, 15 and 16)