14.2.4. Measurement principles for insurance contracts

Under IFRS 17, contracts may be measured according to the following methods:

• GMM – general measurement model – the basic measurement model, wherein the total value of the insurance liability is calculated as the sum of:
  1. discounted value of the best estimate of future cash flows – expected (probability-weighted) cash flows from premiums, claims, benefits and acquisition expenses and costs;
  2. risk adjustment for non-financial risk, RA – an individual estimate of the financial value of the offset for uncertainty related to the amount and timing of future cash flows, and
  3. contractual service margin, CSM – representing an estimate of future profits recognized during the policy term. The CSM value is sensitive to changes in estimates of cash flows, resulting e.g. from changed non- economic assumptions. CSM cannot be a negative value – any losses on the contracts shall be recognized immediately in the income statement (an exception is made for outward reinsurance contracts, for which the CSM may be negative);
• PAA – premium allocation approach

The premium allocation approach (PAA), is a simplified approach where the measurement of liability for remaining coverage (LRC) is analogous to the provision for unearned premiums mechanism in IFRS 4 (without separate presentation of RA and CSM). The PAA method is applied for short-term contracts of up to 1 year and longer, as long as the relevant qualifying criteria for applying the simplification are satisfied, as specified in paragraphs 53 or 69 of IFRS 17. The measurement of liability for incurred claims (LIC) is carried out using the GMM model (without CSM calculations). At the time of implementation of IFRS 17, the PAA method is not used to measure insurance liabilities/assets;

• VFA – variable fee approach

The liability measurement method used for IFRS 17 reporting of insurance contracts with direct profit sharing, where the measurement of liabilities is performed similarly to the GMM approach with the difference that changes in the contract margin component of the CSM in subsequent periods also include the impact of changes in economic factors, not just insurance factors.

Due to the specific nature of the insurance and reinsurance contracts in non-life insurance offered within the Group (insurance of several years), the criteria for applying the simplified valuation method based on premium allocation – PAA – are not met at the date of transition. Accordingly, both life insurance contracts and non-life insurance and reinsurance contracts will be measured using the general model – GMM. The exception to this is direct profit-sharing insurance contracts, for which the Group will use the VFA model.