Statement of financial position

On the face of the statement of financial position, an entity presents separately the carrying amount of:

• groups of insurance contracts issued that are assets;
• groups of insurance contracts issued that are liabilities;
• groups of reinsurance contracts held that are assets; and
• groups of reinsurance contracts held that are liabilities.

Insurance acquisition cash flows are included in the carrying amount of the related insurance contracts, and not presented separately as assets or liabilities

Statement(s) of financial performance

In the statement of financial performance, an entity presents separately:

• insurance service result, containing insurance revenue and insurance service expenses; and
• insurance finance income or expenses.

Income or expenses from insurance contracts issued is presented separately from income or expenses from reinsurance contracts held.

Insurance service result

Insurance revenue reflects the consideration to which the entity expects to be entitled in exchange for the provision of coverage and other services.

Under the general model and the variable fee approach, insurance contract revenue can be calculated in two different ways that both result in the same outcome; in both methods, investment components do not affect revenue.

The first approach is to consider the sum of the changes in the liability for remaining coverage in the period that relate to services for which the entity expects to receive consideration. These would comprise:

• Insurance claims and expenses incurred in the period (measured at the amounts expected at the beginning of the period), but excluding: any amounts allocated to the loss component of the liability; any repayments of investment components; any amounts related to transaction-based taxes collected on behalf of third parties; and any insurance acquisition expenses.
• Changes in the risk adjustment for non-financial risk in the period, but excluding: any changes included in insurance finance income or expenses; any changes that relate to future coverage; and any amounts allocated to the loss component of the liability.
• The contractual service margin recognised in profit or loss in the period.
• The change in expected premium related to coverage in the current or a past period.

This issue was discussed by the IASB Transition Resource Group for IFRS 17 Insurance Contracts (‘TRG’) in September 2018, and the agenda papers and the related meeting summary contain further discussion of this topic.

The second approach is to consider the reduction in the liability for remaining coverage less changes that do not relate to services expected to be covered by the consideration received by the entity. This method starts with the total amount of changes in the liability for remaining coverage, and it then deducts any changes that either do not relate to services provided in the period or for which the entity does not expect consideration. Examples of such changes are:

• Those not related to services provided in the period:
• changes resulting from cash inflows from premiums received;
• changes that relate to investment components in the period;
• changes that relate to transaction-based taxes collected on behalf of third parties;
• insurance finance income or expense;
• insurance acquisition cash flows; and
• derecognition of liabilities transferred to a third party.
• Those for which no consideration is expected:
• increases and decreases in the loss component of the liability for remaining coverage.

Under both methods, insurance acquisition cash flows are allocated in a systematic way on the basis of the passage of time. The amount allocated to each period is included in insurance revenue and insurance service expenses.

Revenue under IFRS 17 will not be equal to the premium received in the period. IFRS 17 makes it clear that an entity should not present premium information in profit or loss if that information is not in line with the definition of insurance revenue.

An entity can include the change in the risk adjustment for non-financial risk in the insurance service result. Alternatively, it can choose to split the amount between the insurance service result and insurance finance income or expenses. Any element of the change in the risk adjustment that relates to future service adjusts the contractual service margin, and so it is not recorded directly in the statement(s) of financial performance.

Entities using the premium allocation approach will determine revenue based on the passage of time or the expected timing of incurred insurance service expenses.

Insurance service expenses

The insurance service expenses will comprise:

• incurred claims;
• other incurred insurance service expenses;
• amortisation of insurance acquisition cash flows;
• changes relating to past services (changes in fulfilment cash flows relating to liabilities for incurred claims); and
• in the case of onerous contracts, changes relating to future services (losses/reversals on onerous groups of contracts).

Payments relating to investment components are excluded from insurance revenue and insurance service expenses.

Reinsurance contracts held

For a group of reinsurance contracts held, IFRS 17 allows two different ways to present income and expenses (other than insurance finance income or expenses). Either the entity can present separately the amounts recovered from the reinsurer (as income) and an allocation of the premiums paid (as expense), or it can present one single net amount.

If the entity decides to show the amounts recovered from the reinsurer and an allocation of the premiums paid separately, it should make a distinction between:

• reinsurance cash flows that are contingent on claims on the underlying contracts; these are treated as part of the claims that are expected to be reimbursed under the reinsurance contract held; and
• reinsurance cash flows that the entity expects to receive that are not contingent on claims on the underlying contracts; these are treated as a reduction in the premiums to be paid to the reinsurer.

The allocation of premiums paid cannot be presented as a reduction in revenue.

Insurance finance income or expenses

Insurance finance income or expenses reflect the changes in the carrying amount of the group of insurance contracts that relate to financial risks. They comprise the effect of the time value of money (that is, the accretion of interest on all of the fulfilment cash flows, the risk adjustment for non-financial risk and the contractual service margin) as well as the effect of financial risk and changes in financial risks.

Insurance finance income or expenses resulting from the risk adjustment for non-financial risk can also be presented as part of the insurance service result.

For groups of insurance contracts with direct participation features, losses might arise if the entity’s share of a decrease in the fair value of the underlying items, or an increase in fulfilment cash flows relating to future services, exceeds the carrying amount of the contractual service margin. These changes are part of the insurance service expenses, even if they arise from the time value of money or financial risks.

A financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, currency exchange rate, index of prices or rates, credit rating or credit index or other variable, provided that, in the case of a non-financial variable, the variable is not specific to a party to the contract.

Assumptions about inflation are considered to relate to financial risk if they are based on an index of prices or rates, or on prices of assets with inflation-linked returns. If they are based on an entity’s expectations of specific price changes, they do not relate to a financial risk.

An entity has an accounting policy choice either to present the entire amount of insurance finance income or expenses for the period in profit or loss, or to split it into one part that is included in profit or loss and the other part that is included in other comprehensive income. The accounting policy choice is applied on a portfolio basis.

If an entity chooses to split insurance finance income or expenses between profit or loss and other comprehensive income, the way in which this is done depends on the method that the entity applies to account for the insurance contract. Furthermore, there is specific guidance for insurance contracts with direct participation features for which the entity holds the underlying items.

Where an entity chooses to split insurance finance income or expenses between profit or loss and other comprehensive income, any foreign exchange differences relating to changes in carrying amounts included in other comprehensive income are also recognised in other comprehensive income, and all other foreign exchange differences are recognised in profit or loss.

Approach A – General model/Variable fee approach for insurance contracts with direct participation features for which the entity does not hold the underlying items

An entity that:

• applies the general model; or
• applies the variable fee approach for insurance contracts with direct participation features for which it does not hold the underlying items, defines a pattern by which the expected total insurance finance income or expenses over the duration of the group of contracts will be allocated systematically to each period. The difference between the amount allocated to each period, based on this systematic allocation, and the total insurance finance income or expenses of the period is recognised in other comprehensive income.

When determining a systematic allocation:

• The allocation should be based solely on characteristics of the contract. The allocation of the finance income or expenses should, for example, not be based on expected recognised returns on assets if those expected recognised returns do not affect the contract cash flows.
• The total amount recognised in other comprehensive income over the life of the contract should be zero.

For groups of insurance contracts where changes in assumptions relating to financial risks do not have a substantial effect on the amount paid to the policyholder, the allocation is made using the discount rate by which estimated future cash flows have been discounted on initial recognition.

For groups of insurance contracts for which changes in assumptions relating to financial risks have a substantial effect on the amount paid to the policyholder, a systematic allocation should be determined in the following ways:

• For fulfilment cash flows, the risk adjustment for non-financial risk (if separately disaggregated) and, for contracts with direct participation features where the entity does not hold the underlying items, the contractual service margin either:
• using a rate that allocates the remaining revised expected finance income or expenses over the remaining duration of the contract at a constant rate (‘effective yield approach’); or
• for contracts that use a crediting rate to determine amounts due to policyholders, using an allocation that is based on the amounts credited in the period and expected to be credited in future periods (‘projected credit rate approach’).
• For the contractual service margin for contracts without direct participation features: using the discount rate used at initial recognition.

The reason for changes in assumptions relating to financial risk having a substantial effect on the amount paid to policyholders can be that there are participation features. But, even if the insurance contract does not qualify as an insurance contract with direct participation features (for example, because there are no clearly identified underlying items), financial risks might have a substantial effect on the payments to the policyholder.

Where an entity transfers a group of insurance contracts or derecognises an insurance contract, any remaining amount previously recognised in other comprehensive income under Approach A is reclassified to profit or loss as a reclassification adjustment.

Approach B – Variable fee approach for insurance contracts with direct participation features for which the entity holds the underlying items

The objective of the disaggregation of insurance finance income and expenses, for insurance contracts with direct participation features for which the entity holds the underlying items, is to eliminate accounting mismatches with income or expenses included in profit or loss arising on the underlying items held.

To achieve this objective, an entity includes, in profit or loss, income or expenses that exactly match the income or expenses included in profit or loss for the underlying items. As a result, the net of the two separately presented items is nil.

When an entity transfers a group of insurance contracts or derecognises an insurance contract, any remaining amount previously recognised in other comprehensive income under Approach B is not reclassified to profit or loss.

Sometimes, an entity that has issued an insurance contract with direct participation features holds the underlying items only in some periods.

• If an entity formerly did not hold the underlying items but subsequently starts to hold them, it stops being eligible to apply Approach A and could apply Approach B prospectively. At this point, the accumulated amount previously included in other comprehensive income is not recalculated as if the new disaggregation had always been applied. Instead, the entity includes in profit or loss the accumulated amount as it is before the change, as if it were continuing Approach A based on the assumptions that applied immediately prior to the change. Prior period comparative information is not adjusted.
• If an entity no longer holds the underlying items, it stops being eligible to apply Approach B and could apply Approach A prospectively. The treatment of the accumulated amounts included in other comprehensive income follows the principle outlined above.

Approach C – Premium allocation approach

An entity that applies the premium allocation approach and chooses, or is required, to discount the liability for incurred claims can also decide to disaggregate insurance finance income or expenses, instead of including the entire amount in profit or loss. If it decides to split the amount, the interest expense in profit or loss is determined using the discount rate at the date of initial recognition of the liability for incurred claims.

Disclosure

The disclosures required in IFRS 17 should allow users of financial statements to assess the effect that contracts within the scope of the standard have on the entity’s financial position, financial performance and cash flows. Information should be aggregated or disaggregated so that useful information is not obscured. The standard includes examples of aggregations that might be appropriate, as follows: type of contract (for example, major product lines); geographical area (for example, country or region); or reportable segment, as defined in IFRS 8.

There are three different kinds of disclosure required, namely qualitative and quantitative information about:

• amounts recognised in the financial statements;
• significant judgements and changes in those judgements; and
• nature and extent of risks.

Explanation of recognised amounts – statement of financial position

General model / variable fee approach

An entity must provide reconciliations showing how the net carrying amounts of contracts changed during the period as a result of cash flows and income and expenses recognised in the statement(s) of financial performance. It discloses reconciliations for:

• net liabilities (or assets) for the remaining coverage component, excluding any loss component;
• any loss component;
• liabilities for incurred claims;
• estimates of the present value of the future cash flows;
• risk adjustment for non-financial risk; and
• contractual service margin.

The reconciliations are given separately for insurance contracts issued and reinsurance contracts held. They are further disaggregated into a total for groups of contracts in an asset position and a total for groups of contracts in a liability position.

IFRS 17 specify the items to be included in each of these reconciliations.

For insurance contracts that are initially recognised in the period, an entity shows separately, for insurance contracts issued and reinsurance contracts held, the effect on:

• the estimates of the present value of future cash outflows, showing separately the amount of the insurance acquisition cash flows;
• the estimates of the present value of future cash inflows;
• risk adjustment for non-financial risk; and
• contractual service margin.

The effects of contracts acquired from other entities in transfers or business combinations, and from groups of contracts that are onerous, are shown separately from other contracts initially recognised in the period.

The entity explains when it expects to recognise the contractual service margin remaining at the end of the reporting period in profit or loss. This information can be provided either quantitatively or qualitatively. It should be provided separately for insurance contracts issued and reinsurance contracts held.

Premium allocation approach

For entities adopting the premium allocation approach, reconciliations are provided of the net liabilities (or assets) for the remaining coverage component (excluding any loss component), any loss component and liabilities for incurred claims, with separate reconciliations for the estimates of the present value of future cash flows and the risk adjustment for non-financial risk. IFRS 17 specify the items to be included in each of these reconciliations.

An entity also discloses the reason why it was eligible to apply the premium allocation approach and:

• whether it chose to adjust the carrying amount of the liability for remaining coverage to reflect the time value of money and the effect of financial risk (provided that the criteria are met); and
• which method it chose to recognise any insurance acquisition cash flows.

Explanation of recognised amounts – statement(s) of financial performance Insurance revenue

An entity provides an analysis of insurance revenue recognised in the period. The analysis contains:

• the insurance service expenses incurred during the period;
• the change in the risk adjustment for non-financial risk;
• the amount of the contractual service margin released to profit or loss because of services transferred in the period; and
• the allocation of the portion of the premiums that relates to the recovery of insurance acquisition cash flows.

This requirement does not apply to contracts that are accounted for using the premium allocation approach.

Insurance finance income or expenses

An entity should disclose and explain the relationship between insurance finance income or expenses and the investment return on the related assets that the entity holds.

For insurance contracts with direct participation features, the following additional disclosures are required:

• The composition of the underlying assets and their fair value.
• The effect of the decision not to adjust the contractual service margin for changes in the effect of financial risk on the entity’s share of the underlying assets when holding derivatives for risk mitigation purposes.
• Additional explanations if the entity changes the split of finance income or expenses shown in profit or loss and in other comprehensive income because it either no longer holds the underlying items or starts to hold them.

Significant judgements

An entity should disclose the methods used to measure insurance contracts and the processes for estimating the inputs to those methods, as well as changes in methods and processes. It provides quantitative information about the inputs, unless it is impracticable to do so. For contracts without direct participation features, an entity should disclose the approach used to distinguish changes in the estimate of future cash flows as a result of the exercise of discretion from other changes in estimates. An entity should disclose the approach to determining the risk adjustment for non-financial risk, including whether changes are disaggregated between an insurance service component and an insurance finance component, or if all are included in the insurance service result. The approach for determining discount rates and investment components should also be disclosed.

If an entity has chosen to disaggregate insurance finance income or expenses, disclosure is required to explain the methods used to determine the amount recognised in profit or loss.

An entity should disclose the confidence level that the risk adjustment corresponds to, both when it uses the confidence level approach and when it uses a different method for determining the risk adjustment for non-financial risk. The yield curve (or range of yield curves) used to discount cash flows that do not vary based on the returns from underlying items should also be disclosed.

Nature and extent of risks that arise from contracts within scope of IFRS 17

An entity discloses information that enables users of its financial statements to evaluate the nature, amount, timing and uncertainty of future cash flows from contracts within the scope of IFRS 17. Risks typically arise from insurance risk and financial risks (including market risk, credit risk and liquidity risk).

For each type of risk, the entity discloses its exposure, how the exposure arises, the entity’s objectives, policies and processes for managing the risk, and the methods that are used to measure the risk. Furthermore, any changes in risks or risk management compared to the previous period should be disclosed.

An entity should provide summary quantitative information about its exposure to each of the risks. At a minimum, the entity should make the disclosures outlined below:

• Insurance risk sensitivity: unless the ‘alternative approach’ is used, a sensitivity analysis showing the effect on profit or loss and equity of reasonably possible changes in insurance risk, both before and after any mitigation by reinsurance contracts, including the methods and assumptions used in preparing the sensitivity analysis, with detail and reasons for any changes from prior periods.
• Market risk sensitivity: unless the ‘alternative approach’ is used, a sensitivity analysis showing, for reasonably possible changes in each type of market risk, the effect, on profit or loss and equity, of the relationship between sensitivity arising from insurance contracts and sensitivity arising from financial assets, including the methods and assumptions used in preparing the sensitivity analysis, with detail and reasons for any changes from prior periods.
• Alternative approach: where an entity prepares sensitivity analysis that shows how different amounts (that is, amounts other than profit and loss and equity) are affected by changes in risk exposures as part of its management of risks from contracts within the scope of IFRS 17, it can use this information instead of the sensitivity described for insurance risk and market risk above. However, in addition, it must disclose an explanation of the method used in its calculation, the key parameters and assumptions, and an explanation of the objective of the method and any resulting limitations in the information disclosed.
• Insurance risk – claims development: unless claims are settled within one year, details of claims development, showing a comparison of actual claims and previous estimates, and a reconciliation with the liabilities for incurred claims.
• Credit risk: amount that best represents the maximum exposure to credit risk and information about the credit quality of reinsurance contracts held that are assets.
• Liquidity risk: maturity analysis of contracts within the scope of IFRS 17, describing how these are managed and showing, at a minimum, each of the first five years and aggregated cash outflows after five years and any amounts that are payable on demand.

An entity should provide information about concentrations of risk. An entity could, for example, provide interest rate guarantees that come into effect at the same level for a material number of contracts, or it could provide product liability protection to pharmaceutical companies in which it also holds investments.

The regulatory framework in which the entity operates might also give rise to risks (for example, due to minimum capital requirements or required interest rate guarantees). These restrictions should be explained in the notes. If legal or regulatory constraints on pricing affect how the entity groups contracts, this fact should also be disclosed.