About

IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 with earlier application permitted as long as IFRS 9 is also applied.

The key principles in IFRS 17 are that an entity:

  • identifies as insurance contracts those contracts under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder;
  • separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts;
  • divides the contracts into groups that it will recognise and measure;
  • recognises and measures groups of insurance contracts at:
    1. a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset)
    2. an amount representing the unearned profit in the group of contracts (the contractual service margin);
  • recognises the profit from a group of insurance contracts over the period the entity provides insurance contract services, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognises the loss immediately;
  • presents separately insurance revenue (that excludes the receipt of any investment component), insurance service expenses (that excludes the repayment of any investment components) and insurance finance income or expenses; and
  • discloses information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity.

Objectives

IFRS 17 Insurance Contracts establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flows.

 

Scope

IFRS 17 provides a comprehensive framework for accounting and reporting of insurance contracts. Its scope includes all insurance contracts, reinsurance contracts, and investment contracts with discretionary participation features. Here are some practical examples of the scope of IFRS 17 for insurance contracts:

  1. Measurement of Liability: Insurance liabilities are required to be measured at current fulfillment value, incorporating all future cash flows associated with the contracts.

  2. Recognition of Revenue: IFRS 17 introduces the concept of earned premium and requires revenue recognition over the coverage period, reflecting the timing of risks and benefits transfer.

  3. Contractual Service Margin (CSM): CSM represents the unearned profit in insurance contracts and must be systematically released to the profit or loss over the coverage period.

  4. Cash Flows: The standard prescribes the use of probability-weighted cash flows, taking into account various scenarios and risk adjustments.

  5. Disclosures: IFRS 17 mandates extensive disclosures to provide users of financial statements with comprehensive information about insurance contracts and their financial impact.

These examples highlight the detailed and extensive requirements under IFRS 17 for insurance contracts, aimed at improving transparency and comparability in financial reporting within the insurance industry.

Recognition

Recognizing IFRS 17 for insurance contracts in the insurance industry involves several key steps, including initial recognition, subsequent measurement, and disclosure & reporting. Here's a breakdown of each aspect with detailed practical examples:

  1. Initial Recognition:

    • Initial recognition involves determining the financial impact of insurance contracts when they are first issued.
    • Insurance liabilities are measured at the present value of future cash flows related to the contracts.
    • Practical Example: An insurance company issues a life insurance policy with premiums to be collected over a 20-year period. The company calculates the present value of expected future claims and benefits to determine the initial liability.

  2. Subsequent Measurement:

    • After initial recognition, insurance liabilities are subject to subsequent measurement, reflecting changes in estimates and assumptions over time.
    • The Contractual Service Margin (CSM) is adjusted to reflect the updated estimates, leading to changes in the carrying amount of insurance contracts.
    • Practical Example: During the policy term, the insurance company updates its assumptions regarding claim payments, resulting in adjustments to the CSM and liabilities to reflect the revised expectations.

  3. Disclosure & Reporting:

    • IFRS 17 requires extensive disclosures to provide transparency on the financial impact of insurance contracts.
    • Key disclosures include information on the measurement of insurance liabilities, revenue recognition, assumptions used, and sensitivity analyses.
    • Practical Example: An insurance company includes detailed disclosures in its financial statements, such as a breakdown of insurance revenue recognized during the period, changes in assumptions impacting insurance liabilities, and explanations of significant variances.

 

Solvency II

Solvency II is a set of regulatory requirements established by the European Union to ensure that insurance companies have enough capital to meet their obligations to policyholders. The regulation sets guidelines for risk management, capital adequacy, reporting, and governance within insurance companies.

From the perspective of an A group financial controller in an insurance company, the application of Solvency II involves several key responsibilities:

1. **Risk Management**: The financial controller is responsible for overseeing the company's risk management processes to ensure compliance with Solvency II requirements. This includes identifying, assessing, and mitigating risks that could affect the company's solvency position. For example, the financial controller may work with the risk management team to assess the impact of different scenarios on the company's capital reserves.

2. **Capital Adequacy**: The financial controller plays a crucial role in monitoring and maintaining the company's capital position in line with Solvency II requirements. This involves regularly assessing the company's capital adequacy against regulatory thresholds and ensuring that enough capital is available to cover potential liabilities. For instance, the financial controller may conduct stress tests to evaluate the company's ability to withstand adverse market conditions.

3. **Reporting**: The financial controller is responsible for preparing and submitting regulatory reports required under Solvency II. This includes the Regular Supervisory Report (RSR) and the Solvency and Financial Condition Report (SFCR). These reports provide detailed information about the company's financial position, risk profile, and governance practices. The financial controller ensures that these reports are accurate, timely, and compliant with regulatory guidelines.

4. **Governance**: The financial controller oversees the company's governance framework to ensure that it aligns with Solvency II principles. This involves establishing clear roles and responsibilities, implementing effective internal controls, and promoting a culture of compliance within the organization. The financial controller may also liaise with regulatory authorities to address any governance-related concerns.

Practical Example:
As an A group financial controller, you may be involved in overseeing the implementation of Solvency II requirements in a multinational insurance company. This could include working with local finance teams in different countries to ensure consistent reporting standards and adherence to regulatory guidelines.

For instance, you may lead the development of a standardized risk assessment framework that integrates local and group-wide risk management practices. This framework would help the company identify and measure risks across its various business lines and geographies, enabling a comprehensive view of the company's solvency position.

Additionally, you could be responsible for coordinating the preparation of the company's SFCR, which provides detailed information about the company's risk profile, capital position, and governance practices. This report would be critical in demonstrating the company's compliance with Solvency II requirements to regulatory authorities and stakeholders.

Overall, as an A group financial controller, your role in applying Solvency II involves ensuring that the company's risk management, capital adequacy, reporting, and governance practices are aligned with regulatory standards and best practices to maintain financial stability and protect policyholders' interests.