IFRS 17
International accounting standard on insurance contracts, effective since 2023, overhauling the measurement of liabilities and profit.
IFRS 17 is the standard that has set, since 2023, how an insurer accounts for its contracts; it replaced IFRS 4, an interim standard. It requires a measurement of insurance liabilities based on the present value of future cash flows, a risk adjustment and a contractual service margin representing the profit not yet earned, spread over the cover period. Its aim is to harmonize and make comparable the accounting of insurers, long marked by heterogeneous national practices. The standard introduces several measurement models depending on the nature of contracts and profoundly changes profit recognition, smoothing the emergence of profit rather than recognizing it at underwriting. For insurers, its implementation represented a considerable systems, data and steering project. For the analyst, it changes the reading of accounts: the contractual service margin becomes a key indicator of a portfolio's stock of future profit.
Example, a group of three-year contracts, single premium of 1,000 received at inception (thousands of euros), discounting ignored to keep the calculation readable (example assumption). Expected fulfillment cash flows: claims and expenses 800, risk adjustment 50. The contractual service margin is 1,000 − 800 − 50 = 150 (paragraph 38); it does not go to profit on day one, it is spread over the coverage units, here equal each year, so 50 a year if nothing changes. End of year one, two variances. The year's claims come in at 300 against 266.7 expected: the 33.3 variance relates to current service and hits the year's result. The estimate of claims for the two remaining years rises by 60: that relates to future service and is taken against the margin (paragraph 44), which falls from 150 to 90 before release; with a third of the units used, the year releases 90 / 3 = 30, leaving 60 for the next two years. Had the increase been 200, the margin would have absorbed only 150 and the 50 loss would have gone to profit at once (paragraph 48): a group that has become onerous keeps no margin. A one-year non-life contract is usually measured under the simplified premium allocation approach (paragraph 53), where this margin does not appear.
IFRS 17, IFRS 17 Insurance Contracts
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