14.2.1. IFRS 17 key assumptions

IFRS 17, as a new accounting standard, will change the recognition, measurement, presentation and disclosure of insurance contracts. The standard applies to insurance contracts, reinsurance contracts and investment contracts with discretionary profit-sharing.

The new standard defines an insurance contract as a contract in which one party accepts a significant insurance risk from the policyholder and undertakes to compensate the insured for an adverse effect arising from, an uncertain future event. This definition is in principle consistent with the definition in IFRS 4

The standard will not apply to, among others, investment contracts, product guarantees issued by the manufacturer, loan guarantees, catastrophe bonds and so-called weather derivatives (contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract).

The biggest impact on the occurrence of differences compared to the current IFRS 4 will have:

• the valuation of liabilities and assets under insurance contracts, which will be:
  • based on the value of the best estimate of future cash flows;
  • reflect the time value of money;
  • include the risk adjustment for non-financial risk;
  • include the expected value of future profits;
• recognition of expected profits for the group of insurance contracts over time, in proportion to the so-called coverage units, corresponding to the level of service provided by the insurance company in each reporting period;
• recognition of entire expected loss on insurance contracts at the point at which the entity assesses that the contract is onerous, which may be at the date of initial recognition of that contract or at subsequent measurement;
• separate (from direct business contracts) measurement of liabilities and assets for outward

For measurement purposes, insurance contracts are aggregated into groups of contracts. Groups of contracts are defined by first identifying portfolios comprising contracts subject to similar insurance risks and managed together. Each portfolio is then divided into quarterly cohorts (i.e. by policy recognition date) and each quarterly cohort into the following three groups:

• a group of contracts that are onerous at initial recognition;
• a group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and
• a group of the remaining contracts in the

Cash flows within the boundary of an insurance contract are those that relate directly to the fulfilment of the contract, including cash flows for which the entity has discretion over the amount or timing.

The cash flows within the boundary include:

• premiums (including premium adjustments and instalment premiums) from a policyholder and any additional cash flows that result from those premiums;
• payments to (or on behalf of) a policyholder, including claims that have already been reported but have not yet been paid (i.e. reported claims), incurred claims for events that have occurred but for which claims have not been reported and all future claims for which the entity has a substantive obligation;
• an allocation of insurance acquisition cash flows attributable to the portfolio to which the contract belongs;
• claim handling costs;
• costs the entity will incur in providing contractual benefits paid in kind;
• policy administration and maintenance costs;
• taxes on transactions.

Separate presentation of outward reinsurance contracts and insurance and reinsurance contracts is required under the new standard.

Within each of these two groups, separate presentation is required for assets and liabilities of portfolios depending on whether the sum of the balance sheet items making up the insurance portfolio measurement is a net asset or liability.

In addition, only the aggregate asset and liability position of insurance contracts will be presented on the balance sheet without distinguishing items such as premium receivables and payables, the balance of acquisition costs or insurance technical reserves.

The standard also requires quantitative and qualitative disclosures, with a focus on the expert judgements applied and the entity’s risk profile.