IFRS 17: A new era of disclosure for insurance contracts

IFRS 17 is the new accounting standard for insurance contracts that applies to periods that commenced on 1 January 2023. It aims to provide a single global comprehensive accounting model for insurance contracts and to increase the transparency and comparability of financial reporting by insurers. One of the key features of IFRS 17 is the disclosure requirements, which are intended to provide users of financial statements with relevant and useful information about the nature, amount, timing, and uncertainty of the cash flows from insurance contracts.

Under IFRS 17, there are three main measurement models for insurance contracts: the general measurement model (GMM), the premium allocation approach (PAA), and the variable fee approach (VFA).

The GMM is the default model and applies to most insurance contracts, unless they meet the criteria for the PAA, which is a simplified model for certain short-duration contracts. The GMM is also known as the building blocks approach, because it measures the value of the contract as the sum of the following components:

(i) The best estimate, which is the expected present value of the future cash flows of the contractual obligations.

(ii) The risk adjustment, which represents the compensation that the insurer requires for bearing the uncertainty in the amount and timing of the cash flows.

(iii) The contractual service margin (CSM), which represents the amount available for overhead and profit on the insurance contract. The purpose of the CSM is to prevent a gain at initiation of the contract.

The disclosure requirements for the GMM are extensive and cover the following aspects:

? The amounts recognized in the statement of financial position and the statement of profit or loss, and how they have changed during the reporting period.

? The significant judgments and assumptions used in measuring the insurance contracts, and the changes in those judgments and assumptions.

? The nature and extent of the risks arising from the insurance contracts, and how the insurer manages those risks.

Some examples of the specific disclosures required under the GMM are:

? A reconciliation of the opening and closing balances of the fulfilment cash flows, the risk adjustment, and the CSM, showing the effects of new business, changes in estimates, experience adjustments, and other movements.

? An analysis of the insurance revenue and insurance service expenses recognized in the statement of profit or loss, showing the allocation of the CSM to each group of contracts and the adjustments for changes in estimates and experience.

? A disclosure of the confidence level used to determine the risk adjustment, and the methods and inputs used to estimate the risk adjustment.

? A disclosure of the discount rates used to measure the fulfilment cash flows, and the sensitivity of the insurance contracts to changes in those rates.

? A disclosure of the sources of uncertainty that affect the amount and timing of the cash flows from the insurance contracts, and the range of possible outcomes.

The disclosure requirements for the GMM are intended to provide a comprehensive and consistent view of the insurance contracts and their performance, and to enable users of financial statements to assess the profitability, risk exposure, and financial position of the insurer. However, they also pose significant challenges for the insurers, as they require a high level of granularity, consistency, and reliability of the data and systems used to measure and report the insurance contracts. Therefore, insurers need to carefully plan and implement their reporting strategy and processes to comply with the new standard and to communicate effectively with their stakeholders.

As the first year-end closure under IFRS 17 is looming, the insurers are facing a critical moment to prepare and present their first set of disclosures under the new standard. The first set of disclosures will be challenging for all stakeholders, as they will require a significant amount of information, analysis, and explanation, as well as a clear and consistent communication of the impact of the new standard on the financial results and position of the insurer. The first set of disclosures will also set the tone and the expectations for the future reporting under IFRS 17, and will influence the perception and confidence of the users of financial statements, such as investors, analysts, regulators, and rating agencies. Therefore, the insurers need to ensure that their first set of disclosures are accurate, complete, and understandable, and that they reflect the substance and the economics of the insurance contracts and the business model of the insurer.