Recognition date under IFRS 17 Insurance Contracts

 

Welcome to IFRS is easy!

IFRS 17 Insurance contracts - Part 4

I raised a poll on IFRS is easy's LinkedIn page and here is the result.

Note that the results here are not necessarily correct. Please continue reading for the correct answer.

Say today is 18 December and you approach an airline (whose accounting year end is 31 December) to book a flight that you intend to take on 2 January. The flight takes approximately 24 hours, so you get to your destination on 3 January. What date do you think the airline will recognize revenue?

The above explains why recognition date is an important concept in all accounting standards.

Under IFRS 9, on the day you become a party to the contractual provisions of a financial instrument, you are required to start recognizing the instrument in your books. So what does IFRS 17 say about recognition?

Now let's go back to our poll.

IFRS 17 extends its requirements because of the peculiarity that comes with transacting with policyholders.

The standard requires companies to recognise a group of insurance contracts issued from the EARLIEST of the following:

• the beginning of the coverage period of the group of contracts;
• the date when the first payment from a policyholder in the group becomes due; and
• for a group of onerous contracts, when the group becomes onerous.

The coverage period starting from 1 Jan is the earliest date in the poll options.

Yes! You made it to the end.

I will be happy to receive any questions you may have about the topic discussed in this blog post.

Share in the comment section about the misconceptions you once had about IFRS 17.

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Written by:

Adedamola Otun

For: IFRS IS EASY

Measurement components of IFRS 17 Insurance contracts

 

Welcome to IFRS is easy!

IFRS 17 Insurance contracts - Part 3

I raised a poll on IFRS is easy's LinkedIn page and here is the result.

Note that the results here are not necessarily correct. Please continue reading for the correct answer.

If you are familair with IFRS 9, you most likely still remember the components that we consider in testing for impairment on financial assets.

To jug your memory, they are Exposure at Default (EAD), Loss Given Default (LGD) and Probability of Default (PD). I will discuss these and the required computations in later posts after completing the IFRS 17 introduction series.

There are 3 major components in measuring insurance contracts:

1. Present value of future cash flows

2. Risk adjustment

3. Contractual service margin

Now let's talk briefly through them.

Present value of future cash flows

When an insurance company receives premiums from the policyholder, many times, the premiums are not one-off. They are often annual payments made by the policyholder over the insurance coverage period. And as you already know, the time value of money always kicks in when cash flows are over a period of time. This is the reason why we are talking about present value.

Simply, the present value of future cash flows is the financial risk of the insurance contract. It represents the discounted inflows (premiums) and outflows (expected claims to be paid to the policyholder, acquisition cost incurred in winning over the policyholder and other direct expenses).

Risk adjustment

This is the compensation to the insurer for bearing the non-financial risk of insuring the policyholder.

Contractual service margin

This is the unearned profit of the insurer that is amortised over the insurance coverage period.

There's a fourth guy in the wheel called the "Fulfillment cash flows". This is simply the addition of the present value of future cash flows and the risk adjustment.

Yes! You made it to the end.

I will be happy to receive any questions you may have about the topic discussed in this blog post.

Share in the comment section about the misconceptions you once had about IFRS 17.

Don’t forget to subscribe to our YouTube channel to get all new IFRS analyses. Also, click on the email subscription button on this page so as not to miss any of our blog updates. 

Written by:

Adedamola Otun

For: IFRS IS EASY

How to measure insurance contracts under IFRS 17

 

Welcome to IFRS is easy!

IFRS 17 Insurance contracts - Part 2

I raised a poll on IFRS is easy's LinkedIn page and here is the result.

Note that the results here are not necessarily correct. Please continue reading for the correct answer.

Almost all accounting standards describe the approach to use in computing the numbers. For example, IAS 2 will tell you to use First-In-First-Out or weighted average method to compute the value of your inventories.

Likewise, IFRS 9 will tell you to use general or simplified method for the value of your impairment allowance on financial assets.

If you consider the complexity in IFRS 9 and IFRS 17, you may see why IFRS 17 did not hesitate to create a simplified method alongside the general method.

There are 3 measurement models for accounting for insurance contracts under IFRS 17.

• General model (Known as the Building Block Approach)
• Simplified model (Known as the Premium Allocation Approach)
• Variable Fee Approach

But before we discuss each of them, there's an important term to note. It's called Participation Feature.

If you are new to insurance, you may be surprised as I am, that there are some contracts that gives the policyholder the benefit of sharing in the gains of the insurer. What this means is that when the insurer receives premiums from the policyholder and invests those premiums, the gains on the investment is shared between the insurer and the policyholder.

This is referred to as a participation feature and it can be direct or indirect.

What is a direct participation feature?

A direct participation feature (DPF) means that the kind of gain that the policyholder gets from the premiums invested meets the 3 criteria below. If they don't, then they are indirect.

1. The underlying items (the investments) that the policyholder wants to participate in must be clearly identified
2. The amount that the insurer wants to pay the policyholder must be a substantial share of the value of the investments
3. Any changes in the amounts the insurer wants to pay the policyholder must vary with the change in the investments

So now let's briefly talk about when you should use the 3 measurement approaches.

If there is a DPF in an insurance contract, the variable fee approach is used. This is because the insurer will deduct a variable fee for the insurance service it has rendered to the policyholder through the investments.

This implies that the general model and the simplified model are used for other insurance contracts especially when there is no participation feature.

Also, the general model is used for the indirect participation feature.

Simplified model is a simplification of the general model and is often used for insurance contracts that are one year or less, or whose result is similar to the general model.

Yes! You made it to the end.

I will be happy to receive any questions you may have about the topic discussed in this blog post.

Don’t forget to subscribe to our YouTube channel to get all new IFRS analyses. Also, click on the email subscription button on this page so as not to miss any of our blog updates. 

Written by:

Adedamola Otun

For: IFRS IS EASY