Lesson 16 - Advanced Accounting Course

16. IFRS 17: Insurance Contracts – Key Concepts and Implications

🔍 What Is IFRS 17?

IFRS 17 is the international accounting standard that explains how insurance companies should report their insurance contracts in financial statements.

It replaces IFRS 4 and aims to make insurance accounting more transparent, consistent, and comparable across different countries and types of insurance companies.

🧠 Why Was IFRS 17 Introduced?

Before IFRS 17, insurance companies used different methods to calculate and report insurance contracts. This made it hard to compare one insurer with another, and difficult for investors to understand how much profit came from their core insurance business.

IFRS 17 fixes this by:

• Creating one single model for all insurance contracts.
  
  

• Making insurers show how they earn profits over time.
  
  

• Improving transparency about future risks and obligations.
  
  

📝 What Is an Insurance Contract?

An insurance contract is an agreement where:

• One party (the insurer) agrees to compensate another party (the policyholder) for a loss or damage,
  
  

• In exchange for a payment (called the premium).
  
  

Examples:

• Life insurance
  
  

• Car insurance
  
  

• Health insurance
  
  

• Travel insurance
  
  

📘 How Does IFRS 17 Work?

Under IFRS 17, insurers must:

1. Measure insurance contracts based on current estimates of future cash flows.
   
   

2. Recognize profits gradually over time as they provide insurance coverage (not all at once).
   
   

3. Separate insurance revenue and investment income in financial statements.
   
   

⚙️ The 3 Key Components of the IFRS 17 Model

1. Expected Future Cash Flows
   Estimate all future incoming and outgoing payments related to the contract (claims, premiums, expenses, etc.).
   
   

2. Discounting (Time Value of Money)
   Adjust future cash flows to reflect today’s value, using a discount rate. This is because money today is worth more than money in the future.
   
   

3. Risk Adjustment
   Add a buffer for uncertainty — the insurer may pay more than expected.
   
   

4. Contractual Service Margin (CSM)
   This is the profit the insurer expects to make on the contract.
   ➤ It’s not recorded immediately — it’s spread over time, as insurance services are provided.
   
   

In short: Revenue and profit are shown gradually as the insurer earns them, not upfront when the policy is sold.

📊 Impact on Financial Statements

📌 Income Statement

• Revenue is now recognized as insurance service is provided.
  
  

• Clear separation between insurance revenue and investment returns.
  
  

• Profits are shown over the life of the policy, not at the beginning.
  
  

📌 Balance Sheet

• Liabilities reflect updated estimates of future payments.
  
  

• There is now a clearer view of unearned profits (CSM) and future obligations.
  
  

📁 Types of Contracts Under IFRS 17

There are 3 measurement models depending on the type of contract:

🧮 Example: How IFRS 17 Works

A company sells a 5-year life insurance policy.

• The policyholder pays €1,000 per year.
  
  

• The insurer expects to pay €3,500 in claims over 5 years.
  
  

Under IFRS 17:

• The insurer estimates future inflows and outflows.
  
  

• It calculates a Contractual Service Margin (CSM) — the expected profit.
  
  

• That profit is then spread over 5 years, not recorded upfront.
  
  

So:

• Each year, the insurer shows a portion of the profit as insurance revenue.
  
  

• If actual claims are higher than expected, profits go down (and vice versa).
  
  

🔍 Key Benefits of IFRS 17

• 📈 Better Comparability: Across different insurers and countries.
  
  

• 💡 Improved Transparency: Investors can clearly see what profits are from insurance, and what is from investments.
  
  

• 🎯 Up-to-Date Estimates: Financials reflect current data, not outdated assumptions.
  
  

• 🔁 Profit Spreading: Matches revenue with the service period, making earnings more realistic and fair.
  
  

📉 Challenges for Companies

• Complex to implement — it requires new systems, data, and processes.
  
  

• Companies need to retrain staff and adjust their IT systems.
  
  

• May affect reported profits, especially in early years of transition.
  
  

🌍 Who Must Use IFRS 17?

All companies reporting under IFRS that issue insurance contracts, including:

• Life insurance companies
  
  

• General insurers (car, home, health)
  
  

• Reinsurers
  
  

• Some banks and financial institutions (if they offer insurance-like products)
  
  

✅ Summary: IFRS 17 at a Glance

📬 Final Thoughts

IFRS 17 brings clarity and trust to insurance accounting. While it is more complex to apply, it gives a much clearer picture of how insurance companies perform, where profits come from, and how reliable those profits are. For investors, regulators, and insurers, it’s a big step forward in modern, fair, and transparent reporting.