General model of measurement of insurance contracts

Last update 17/12/2019

General model of measurement of insurance contracts – Insurance contracts may be highly complex bundles of interdependent rights and obligations and combine features of a financial instrument and features of a service contract. As a result, insurance contracts can provide their issuers with different sources of income – e.g. underwriting profit, fees from asset management services and financial income from spread business (when insurers earn a margin on invested assets) – often all within the same contract. [IFRS 17 IN5, IFRS 17 BC18]

The general measurement model introduced by IFRS 17 provides a comprehensive and coherent framework that provides information reflecting the many different features of insurance contracts and the ways in which the issuers of insurance contracts earn income from them. General model of measurement of insurance contracts

Under IFRS 17, insurance contracts are aggregated into groups. When measuring a group of insurance contracts, IFRS 17 identifies two key components of the liability, the fulfilment cash flows and the CSM. For profitable groups of contracts, the CSM has an equal and opposite value on initial recognition to the fulfilment cash flows, plus any cash flows arising from the group at or before that date. This is because the entire value of the contracts relates to services to be provided in the future, and therefore, profit to be earned in the future. [IFRS 17 24, IFRS 17 32 and IFRS 17 38]

After inception, the fulfilment cash flows are reassessed and remeasured at each reporting date, using current assumptions, identifying those changes that are part of insurance revenue, insurance service expense and insurance finance income or expense. The CSM is allocated to profit or loss as a component of revenue. [IFRS 17 40 -42]

The general model of measurement of insurance contracts is based on the following estimation parameters: General model of measurement of insurance contracts

• fulfilment cash flows, comprising of: General model of measurement of insurance contracts
  • a current estimate of unbiased and probability-weighted future cash flows expected to arise during the life of the contract;
  • a discount adjustment to reflect the time value of money and financial risks, such as liquidity and currency risks (layers of discounting);
  • an explicit risk adjustment for non-financial risks; and General model of measurement of insurance contracts
• a contractual service margin representing the unearned profit from the contract. General model of measurement of insurance contracts

The diagram below summarises the major estimation parameters in the general model and how the changes in the estimation parameters flow into the statement of comprehensive income. Measurement of each building block and its impact on the statement of comprehensive income are considered in more detail. General model of measurement of insurance contracts

FCF^x   = Fulfilment Cash Flows (see above for components)  General model of measurement of insurance contracts

After initial recognition of a group of insurance contracts, the carrying amount of the group at each reporting date is the sum of:

Liability for remaining coverage – An entity’s obligation to investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred (i.e., the obligation that relates to the unexpired portion of the coverage period).  General model of measurement of insurance contracts

Liability for incurred claims – An entity’s obligation to investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been reported and other incurred insurance expenses. General model of measurement of insurance contracts

See also: The IFRS Foundation

General model of measurement of insurance contracts