IFRS 17: Insurance Contract – Requirements and impacts of implementation
Abiola Fajimi MCIoD, FCA, CISA
Entrepreneur, Auditor, business advisor, Coach and Public Speaker
What is IFRS 17
IFRS 17 is the first truly international, comprehensive accounting Standard for insurance accounting. IFRS 17 replaces IFRS 4 ─ an interim Standard that resulted in divergent practices. IFRS 17 ensures consistent accounting for all insurance contracts, provides updated information about obligations, risks and performance of insurance contracts. IFRS 17 applies to all entities that issue insurance contracts and significantly expected to affect entities in the insurance industry.
IFRS 17 is effective for annual periods beginning on or after 1 January 2023 and insurance companies in Nigeria are expected to present the IFRS 17 complaint financial statements as at 31 December 2023.
IFRS 17?Insurance Contracts?establishes the principles for the recognition, measurement, presentation and disclosure of Insurance contracts.
Scope of the Standard
An entity shall apply IFRS 17?Insurance Contracts?to:
??????? Insurance contracts, including reinsurance contracts;
??????? Reinsurance contracts it holds; and
??????? Investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.
It excludes from the scope of the Standard:
·?????? Warranties issued by manufacturers.
·?????? Retirement benefit obligation
·?????? Insurance contracts held by an entity, unless those contracts are reinsurance contracts
Definition of Insurance Contract
A contract under which one party (the issuer) 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.
Some key definitions under IFRS 17
Portfolio of insurance contracts - IFRS 17 requires that Insurance contracts subject to similar risks and managed together should be group together as a class of insurance.
Contractual service margin - A component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit the entity will recognise as it provides services under the insurance contracts.
Insurance risk
Risk, other than financial risk, transferred from the holders of an insurance contract to the issuer.
Fulfilment cash flows
An explicit, unbiased and probability-weighted estimate (i.e. expected value) of the present value of the future cash outflows less the present value of the future cash inflows that will arise as the entity fulfils insurance contracts, including a risk adjustment for non-financial risk.
Risk adjustment for non-financial risk
The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows arising from non-financial risk as the entity fulfils insurance contracts.
Separating components from an insurance contract
An insurance contract may contain one or more components that would be within the scope of another standard if they were separate contracts.
Measurement of Insurance Contract
There are 2 methods permitted for accounting for insurance contract:
-????????? Core Requirements
-????????? Premium Allocation Approach
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Core Requirements
All insurance contracts is measured as the sum of:
(a) the fulfilment cash flows (“FCF”), which comprise:
????? (i)??????????? estimates of future cash flows;
???? (ii)??????????? an adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the future cash flows; and
?? (iii)??????????? a risk adjustment for non-financial risk
(b) the contractual service margin (“CSM”) which is the unearned profit.
The estimated future cash flows include the premium, acquisition expenses, claims and benefits. The cash flows are discounted using a factor that reflect the time value of money and financial risk. The risk adjustment is determined using various methods like cost of capital, value at risk or margin of deviation as recommended by the Solvency II. Any loss on Onerous contract is recognised at the initial recognition.
Subsequent Measurement
The carrying amount of a group of insurance contracts at the end of each reporting period shall be the sum of:
(a) the liability for remaining coverage comprising
??????? (i) the Future Cash flows related to future services and;
??????? (ii) the Customer Service Margin of the group at that date;
(b) the liability for incurred claims, comprising the Future Cash Flows related to past service allocated to the group at that date.
Premium Allocation Approach
Premium allocation approach is an optional measurement approach for simple eligible contracts that achieves similar outcomes to the core model in a less costly way. It is similar to currently used “unearned premium” approach in Nigeria. It is appropriate for General Business and short-term Life policies. It applies to contracts with coverage period of less than 1 year. The premium is amortized over the duration of the policy.
Subsequent to initial recognition, the insurance contract liability is determined as premium less earned premium, acquisition cost less amortised acquisition expense plus outstanding claims and Incurred But Not Reported Claims.
Insurance contract with Participatory features
An insurance contract may contain one or more components that would be within the scope of another standard if they were separate contracts. For example, an insurance contract may include an investment component or a service component (or both). Common example is the deposit administration/ life saving product.
Reinsurance Contract
Reinsurance contract is recognised comprising of reinsurance premium and reinsurance claims recoverable. Cedant recognises re-insurance contract held (normally an assets) and insurance contract liabilities (normally a liability). On initial recognition, the CSM is determined similarly to that of direct insurance contracts issued.
Presentation and disclosure
Reinsurance assets are presented separately from the insurance contract on the face of:
The implementation of IFRS 17 in Nigeria is likely to have several impacts on insurance companies including:
1. Financial Reporting Changes: Insurance companies will need to adjust the financial reporting processes to comply with the new standards. This includes changes in how they recognize revenue, measure liabilities, and present financial statements.
2. Actuarial Processes: Actuarial processes will need to be updated to meet the new requirements for measuring insurance contract liabilities. This will involve changes in assumptions, methodologies, and data management practices.
3. Data Systems and Technology: Insurers may need to invest in new data systems and technology to capture and analyze the information required for IFRS 17 reporting. This could involve upgrades to existing systems or the implementation of entirely new software solutions.
4. Business Strategies: IFRS 17 could impact insurance companies' business strategies, including product development, pricing, and reinsurance arrangements. Insurers may need to reconsider their strategies to adapt to the new accounting standards and maintain profitability.
5. Risk Management: The new standards may also affect how insurance companies manage risk. They will need to assess the impact of IFRS 17 on their risk profile and make any necessary adjustments to their risk management practices.
6. Training and Education: Insurance companies will need to provide training and education to the employees to ensure they understand the implications of IFRS 17 and can effectively implement the necessary changes.
Overall, the implementation of IFRS 17 is expected to require significant time, resources, and expertise from insurance companies in Nigeria. However, it also presents an opportunity for insurers to improve transparency, comparability, and accountability in their financial reporting.