IFRS 17 Insurance Contracts was issued by the International Accounting Standards Board and is the first truly international accounting standard for insurance, having officially replaced IFRS 4 as of January 1, 2023. It was designed to bring transparency and comparability to a sector that was previously subject to varying local practices. The core of IFRS 17 concerns moving from “premiums received” to “services delivered.”
The three measurement models
Under IFRS 17, insurers must choose between one of three models to value their contracts, depending on the nature and duration of the risk involved:
GMM
General Measurement Model. Suited to long term contracts e.g. Life, annuities etc.
PAA
Premium Allocation Approach: Suited to short-term (1 year or less) or simple P&C contracts.
VFA
Variable Fee Approach: Suited to contracts with direct investment participation (e.g. Index Linked).
The Four "Building Blocks" of Liability
For the default GMM model, the value of an insurance contract is built from four distinct components:
- Future cash flows: Current estimates of all premiums coming in and claims/expenses going out.
- Discounting (time value of money): Adjusting those future cash flows to their present value using current interest rates.
- Risk adjustment: An extra buffer for the "non-financial risk" (the uncertainty of when and how much you will actually pay out).
- Contractual Service Margin (CSM): This is the unearned profit. Instead of booking profit on Day 1, it is sitting on the balance sheet and released into the P&L as the service is provided over the years.
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