The IFRS 17 contractual service margin: a life insurance perspective

W Yousuf,C Er,T Berry,A Ghosh,N Mirin,L Tan,J Stansfield,C Iftode,A Pelsser,W Qin,R Walton,B Thorpe,R Dyble,K Malde,J Thorpe

doi:10.1017/s1357321721000015

Abstract

Abstract IFRS 17 Insurance Contracts is a new accounting standard currently expected to come into force on 1 January 2023. It supersedes IFRS 4 Insurance Contracts. IFRS 17 establishes key principles that entities must apply in all aspects of the accounting of insurance contracts. In doing so, the Standard aims to increase the usefulness, comparability, transparency and quality of financial statements. A fundamental concept introduced by IFRS 17 is the contractual service margin (CSM). This represents the unearned profit that an entity expects to earn as it provides services. However, as a principles-based standard, IFRS 17 results in entities having to apply significant judgement when determining the inputs, assumptions and techniques it uses to determine the CSM at each reporting period. In general, the Standard resolves broad categories of mismatches which arise under IFRS 4. Notable examples include mismatches between assets recorded at current market value and liabilities calculated using fixed discount rates as well as inconsistencies in the timing of profit recognition over the duration of an insurance contract. However, there are requirements of IFRS 17 that may create economic or accounting mismatches of its own. For example, new mismatches could arise between the measurement of underlying contracts and the corresponding reinsurance held. Additionally, mismatches can still arise between the measurement of liabilities and the assets that support the liabilities. This paper explores the technical, operational and commercial issues that arise across these and other areas focusing on the CSM. As a standard that is still very much in its infancy, and for which wider consensus on topics is yet to be achieved, this paper aims to provide readers with a deeper understanding of the issues and opportunities that accompany it.

Highlights

As a principles-based standard, IFRS 17 results in entities having to apply significant judgement when determining the inputs, assumptions and techniques it uses to determine the contractual service margin (CSM) at each reporting period
The analysis leads into deeper, technical considerations in relation to loss components (LC) systematic reversals: whether the systematic allocation ratio (SAR) can exceed 100%; whether other comprehensive income (OCI) should be included in reversals; how the timing of assumption updates affects the SAR; whether insurance acquisition cash flows can be systematically allocated to the LC
Rather than amortising the loss-recovery component based on amounts by which the underlying LC are amortised, paragraph BC74 can be read as requiring the systematic reversal of the lossrecovery component to be treated to LC by way of similar methodologies being applied in both instances

Summary

Introduction

To give an overview of the level of aggregation requirement under IFRS 17 and highlighting the implications this has on the CSM (and the financial results of a company) It discusses challenges in determining the date of initial recognition for groups of insurance contracts. Certain experience variances, which are recorded in the income statement in the current period, may have a knock-on impact on the fulfilment cash flows related to future service These must be considered when adjusting the CSM. For companies with a 31 December year end, this gives a transition date of 1 January 2022 To provide these comparative statements, entities will need to calculate the following for each group of contracts, as at the transition date, using one of the three transition approaches as set out in Appendix B of the IFRS 17 Standard:. This deferral of profit recognition is intended to provide a meaningful measure of annual profitability and is fundamentally different from a purely balance sheet-focused approach that capitalises expected economic profits upfront (as would typically be used when assessing economic value).

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