IFRS 17

IFRS 17 is a comprehensive insurance accounting standard that provides guidance for the recognition and measurement of insurance contracts. It replaced IFRS 4 and took effect in 2023. The new standard, which relies heavily on forward-looking estimates and assumptions, represents a major shift, especially for life and health insurance, and to a lesser degree for non-life (general) insurance.

At its core, IFRS 17 introduces the concept of the Contractual Service Margin (CSM) — a deferred profit representing unearned service. The CSM acts as a buffer, absorbing changes in expected cash flows that previously caused volatility in profit or loss. As a result, underwriting profits become smoother and more consistent over time.

The standard provides three measurement models:

The General Model (Building Block Approach) – the default approach under IFRS 17 used primarily for life and health insurance and serving as the foundation for the others. Under this model, insurers shall calculate the Risk Adjustment (RA) and the Present Value of Future Cash Flows (PVFCF), which also includes acquisition costs previously recognised as a separate asset (DAC), as follows:

If PVFCF represents a liability, a loss is recognised immediately.
If PVFCF represents an asset, profit is not recognised immediately. Instead, a CSM liability is established and released systematically over the coverage period. Consequently, the underwriting profit in the statement of comprehensive income (excluding assumption updates) consists of:

The release of the CSM (which accrues interest), and
The release of the Risk Adjustment.

The CSM is adjusted for factors such as the passage of time, incurred claims and updated expectations.
Adjustments for past events (e.g., claims incurred) are recognised in profit or loss.
Adjustments for future service costs (e.g., expected future coverage) are added to or deducted from the CSM.

If changes in expectations fully deplete the CSM, any further loss is recognised immediately in profit or loss, treating the contract as onerous. Additionally, insurers may choose to present the impact of changes in discount rates and financial risk assumptions either in profit or loss or in other comprehensive income. In certain markets, where analysts focus mainly on total comprehensive income, this option may have limited practical impact.

The Variable Fee Approach (VFA) – applied primarily to participating contracts (contracts sharing returns with policyholders) that meet specified criteria. Under the VFA, the insurer’s obligation to policyholders is decomposed into account balances and management fees. The model reduces profit or loss volatility arising from changes in the present value of expected fees by deferring those effects within the CSM.

The Premium Allocation Approach (PAA) – a simplified model applicable mainly to short-term contracts (such as general insurance). It mirrors the previous “unearned premium” method under IFRS 4. The unearned portion of premiums for coverage not yet provided is recognised over the coverage period, typically on a straight-line basis, without the need to calculate present values.

In summary, IFRS 17 replaces earlier simplified accounting under IFRS 4 with a more consistent, transparent framework that recognises unearned profits (CSM) and aligns insurance results with the pattern of service provision to policyholders.