Much of insurance reporting is based on established practices largely due to lack of comprehensive guidance in the current IFRS. Although IFRS 4 deals with some principles, the standard when it was developed was meant to be transitory and not to comprehensively deal with insurance reporting. IFRS 17 will introduce significant changes to the way insurance entities report particularly life insurance companies. When IFRS 17 is applied in 2021, it will provide investors, policy holders and other users of information with consistent information for all insurance contracts as well as new metrics for evaluating the performance of insurers. Information that may already be available for some companies through current measures will be available for all in a more comparable manner. To help investors and other users adapt to the changes and better anticipate how the new Standard could affect their analyses, this issue of translates existing terminology and metrics into the language of IFRS 17.
1. Earned Premiums
These will be reported as Insurance revenue under IFRS 17. Insurance revenue under IFRS 17 will be similar to earned premiums for non-life business. Insurance revenue will be significantly different for all other contracts, including life and participating contracts.
2. Premiums written
Equivalent measure for premiums written under IFRS 17 will be Present value of new business premiums (PVNBP). Premiums written is not a required IFRS 17 metric. However, the present value of new business premiums will be presented separately in the notes (as part of the insurance contract liability roll forward).
3. Gross and net premiums –
Currently gross premiums are those charged to policyholders. Net premiums are often calculated by deducting any premiums ‘ceded’ to reinsurers (ie by deducting the premiums paid for reinsurance coverage) and brokerage and commission payments.
Under IFRS 17 insurance revenue will not include any deduction for ‘ceded premiums’ or acquisition costs. The effects of reinsurance will be separately presented in the balance sheet and in the income statement; a separate roll forward will be disclosed in the notes.
4. Underwriting profit
Equivalent measure under IFRS 17 is insurance service result. Currently underwriting profit is reported as premium income less insurance claims and expenses. Generally, this metric is only applicable to non-life insurance, given that for life insurance companies a significant financial result means that the main focus is on measures of operating profit, which incorporate both the return from underwriting and from financial investments.
An insurance service result subtotal will be required under IFRS 17 for all insurance contracts, and will exclude investment income and insurance finance expenses. The amount reported for the insurance service result may differ from underwriting profit under existing accounting due to differences in the measurement basis used.
5. Operating profit
Equivalent measure under IFRS 17 is Insurance service result plus net financial result. This profit subtotal is commonly interpreted to include investment income on assets backing insurance liabilities. Companies may ‘adjust’ it to exclude some gains and losses related to insurance activities such as the component of the return on assets related to unexpected market movements.
Operating profit subtotals are not defined in IFRS 17 (or in other IFRS Standards), but are likely to refer to the sum of the insurance service result plus the net financial result (the return on assets backing the insurance business less the insurance finance expenses). The amounts presented in the net financial result will be affected by whether and to what extent a company presents gains and losses in Other Comprehensive Income.
6. Contractual service margin (CSM)
Currently the pattern of profit recognition varies by the products and by the accounting method chosen. A day one gain may be reported in the income statement when a new contract is written. The present value of future profits on new business is often provided as part of reporting or embedded value information. The CSM of new business determined under IFRS 17 represents the unearned profit on in force business. The roll forward of the CSM will provide information about the amount of CSM added by new contracts written in the period. This will therefore give consistent information about the value added from new business and is likely to resemble the ‘new business profit’ measures commonly presented in reporting or embedded value information.
7. Unearned premium reserve (UPR) – Liability for remaining Coverage (LRC)
Equivalent IFRS 17 measure for UPR is Liability for remaining coverage (LRC). A liability reported on the balance sheet representing the part of premiums received and receivable that is applicable to the unexpired portion of the policy.
Under IFRS 17 UPR will be included in the overall insurance liability in the balance sheet and be separately identified as the ‘liability for remaining coverage’ in the notes with a detailed roll forward provided. Investors will be able to analyse the LRC by components—present value of cash flows, adjustment for risk and CSM
8. Claims or loss reserves – Liability for incurred claims
Claims or loss reserves represents a liability reported on the balance sheet for the estimated cost of outstanding insurance claims—claims incurred plus claims handling costs less amounts already paid. It includes specific reserves for individual claims plus claims estimated to have occurred, but for which no individual claims have been identified (claims incurred but not reported—IBNR). In practice, claim reserves may include different levels of ‘conservatism’ (ie reserve buffers), and may or may not be discounted.
Under IFRS 17 claim or loss reserves will be included in the overall insurance contract liability on the balance sheet, and separately identified as ‘liability for incurred claims’ in the notes, with a detailed roll forward. The liability equals the probability-weighted expected cash outflows plus explicit adjustment for risk. Discounting will be applied if material.
9. Deferred acquisition costs—DAC
In the current practice acquisition costs, including commissions and other initial expenses incurred in the course of obtaining business and issuing policies, are capitalised in the balance sheet, and amortised as an expense in subsequent periods. Accounting for acquisition costs varies, with some companies immediately expensing. If these costs are capitalised, they are included in the liability adequacy test.
With IFRS 17 DAC will not be presented as an asset under IFRS 17. Contract acquisition costs are included in insurance contract fulfilment cash flows and are therefore reflected in the overall insurance contract liability without being identified as a separate component in the balance sheet (although the allocated acquisition cost expense is reported separately in the income statement).
10. Liability adequacy test
Currently a test to ensure that the liability for insurance contracts, after deducting deferred acquisition costs and capitalised intangibles, is sufficient considering current estimates of cash flows and current discount rates. If the test determines that the balance sheet liability is ‘inadequate’, it leads to an increase in the liability and a loss in the income statement. The approaches used for this test vary; cash flow can be aggregated at a high level, and discounting may effectively take into account the benefit from forecast investment returns.
Under IFRS 17 this test will not be required under IFRS 17 because the fulfilment cash flows are always based on current assumptions including current market variables.
Training and Advisory Service(TAS) expert team is available to assist you with IFRS 17 implementation. Contact me on elles@tas.co.zw[/vc_column_text][/vc_column][/vc_row][vc_row 0=””][vc_column 0=””][wpo_frontpageposts num_mainpost=”1″][/vc_column][/vc_row]