2023 is a very important year for the insurance industry: The complex IFRS 17 framework was set in force on 1st January 2023 and replaces the interim standard IFRS 4 Phase I, which has been in force since 2005. The new standard regulates the principles for identification, recognition, measurement, presentation and disclosures for insurance contracts.
Alma is going to accompany the implementation of IFRS 17 by the insurance industry. Therefore, Alma will publish from time to time brief and well understandable articles on IFRS 17.
Part 5: How to start IFRS 17.
Ad 1: In scope of IFRS 17?
In general the scope is similar to IFRS 4. The focus is on types of contracts. Therefor it applies to all entities whether they are a licensed insurance company or not. An entity applies IFRS 17 to contracts that meet the definition of insurance contracts, which in general includes insurance and reinsurance contracts that they issued and reinsurance contracts that they hold.
Ad 2: Are there distinct investment components?
Insurance contracts include a bouquet of rights and obligations. Some of these components are treated separately from IFRS 17 because they are addressed in other IFRS standards. An investment component is separated from the host insurance contract and accounted for in accordance with IFRS 9. The investment component is „distinct“:
- If the investment component and the insurance component are not highly interrelated and
- a contract with equivalent terms is sold or could be sold separately in the same market or jurisdiction.
An embedded derivative is separated from the host insurance contract under IFRS 9 when the characteristics and risks are not closely related to the host issuance contract and the embedded derivative would not be an insurance contract as a stand-alone instrument.
Ad 3: Are there distinct service components?
Insurance contracts include a bouquet of rights and obligations. Some of these components are treated separately from IFRS 17 because they are addressed in other IFRS standards. A right to provide goods or non-insurance services is distinct if the policyholder can benefit from the goods or services either on their own or with other resources that are readily available to the policyholder. The entity applies IFRS 15.
Ad 4: Determine the level of aggregation
The entity determines the level of aggregation. These are portfolios and groups of contracts – also called Unit of Accounts – UoA – which are subject to similar risk and managed together.
Ad 5: Determine the measurement model
Please, have a look on part 3 – Some technical aspects.
IFRS 17 provides the General approach or Building Block approach (BBA), the Premium Allocation Approach (PAA) and the Variable Fee Approach (VFA).