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IFRS 17 and insurer accounting
What IFRS 17 changed in insurer accounting, how the general model and premium allocation approach work, and why U.S. business buyers rarely see it directly.
IFRS 17 is the international accounting standard for insurance contracts. The International Accounting Standards Board issued it in May 2017, it replaced IFRS 4 and it applies to annual reporting periods beginning on or after 1 January 2023 (IFRS Foundation, IFRS 17). It changes how insurers outside the United States report revenue, claims liabilities and profit, but it does not change what your policy covers or what you pay. U.S. insurers report under U.S. GAAP and state statutory accounting, so IFRS 17 reaches U.S. businesses only through foreign-owned insurers, Lloyd's and reinsurers who report under it.
What problem it solves
Before IFRS 17, accounting for insurance contracts varied widely between countries. IFRS 4 let insurers keep their national practices, so comparing two insurers' reported profits across borders was difficult. IFRS 17 sets one method for measuring insurance liabilities and recognizing profit, so long-term contracts and short-term contracts, and insurers across jurisdictions, follow common principles.
The core measurement
Under IFRS 17, groups of insurance contracts are measured at the fulfilment cash flows, which are a risk-adjusted present value of future cash flows, plus or minus the contractual service margin (CSM) (IFRS Foundation). Three building blocks:
- Estimates of future cash flows: premiums, claims, expenses, from the insurer's current assumptions.
- Discounting: those cash flows are discounted to present value to reflect the time value of money, using current rates.
- A risk adjustment: compensation the insurer needs for bearing uncertainty about the amount and timing of cash flows.
The CSM represents the unearned profit in the group of contracts. The IFRS Foundation says profit is recognized over the period the entity provides insurance contract services, as it is released from risk, and that loss-making groups are recognized as losses immediately. Insurers also group contracts into portfolios and by profitability and, in general, annual cohorts of issue.
The three measurement models
| Model | Used for | Notes |
|---|---|---|
| General model (building block approach) | Most long-term insurance contracts | Fulfilment cash flows plus CSM, with the CSM adjusted for changes in future-service estimates |
| Variable fee approach (VFA) | Contracts with direct participation features, such as some with-profits and unit-linked life | A variation on the general model for contracts where policyholders share in investment returns |
| Premium allocation approach (PAA) | Short-duration contracts, typically one year or less | Optional simplified approach for simpler contracts; the IFRS Foundation describes it as an optional simplified measurement approach |
Property and casualty insurers, which write most business insurance, generally use the PAA for their annual policies, with the general model for the liability for incurred claims. Even so, the standard changes the presentation of results.
What changes for commercial insurers
- Insurance revenue replaces written premium. Under IFRS 17, revenue reflects the service provided in the period, not premiums written or received. Investment components that are repaid regardless of an insured event are excluded.
- Claims liabilities are discounted. Reserves for incurred claims are discounted for long-tail lines such as liability and workers' compensation, with a separate risk adjustment, which can lower reported reserves and move profit between underwriting and finance lines.
- Insurance service result versus finance result. The effect of discounting and interest rate changes goes to insurance finance income or expense, separate from underwriting results.
- Onerous contracts. Groups expected to lose money are flagged and the loss recognized at once.
- Reinsurance. Reinsurance held is measured separately from the underlying contracts, with its own CSM-like margin.
- Ratios change. Loss ratios and combined ratios computed under IFRS 17 may not line up with those under U.S. GAAP or statutory accounting, so comparing an IFRS insurer's reported combined ratio to a U.S. carrier's requires care.
The June 2020 amendments issued by the IASB were meant to assist entities implementing the standard without unduly disrupting implementation or diminishing the usefulness of the information, according to the IFRS Foundation. They also pushed the effective date to 2023.
Where U.S. readers meet it
- Lloyd's and the London market. Lloyd's and its syndicates report under IFRS; How Lloyd's of London works: syndicates, brokers and what it means for you covers how the market is organized.
- European and Bermuda groups with U.S. operations. Groups headquartered in IFRS jurisdictions publish IFRS 17 results, while their U.S. subsidiaries file statutory statements (The Bermuda insurance and reinsurance market; Swiss Re Corporate Solutions).
- Reinsurers. Reinsurance results and sector reports often come in IFRS terms.
- U.S.-listed insurers generally use U.S. GAAP; the FASB's long-duration targeted improvements apply to long-duration contracts and are separate from IFRS 17.
IFRS 17 is an accounting rule; it does not itself set minimum capital. Capital adequacy comes from regulators (risk-based capital: how regulators measure insurer strength, Solvency II, the ICS and global capital rules).
Practical use for buyers
You do not need to read IFRS statements, but they can help in vendor due diligence on a large or global program.
- Read the right ratio. If an insurer reports both a statutory and an IFRS combined ratio, use the one tied to the entity issuing your policy.
- Check what the entity is. Is your policy written by a U.S. subsidiary filing under statutory accounting, by a Lloyd's syndicate or by a foreign branch? Accounting differs, and so do regulators and protections.
- Compare ratings, not accounting. Financial strength ratings use their own models (AM Best ratings explained for business buyers).
- Expect different vocabulary. "Insurance revenue," "insurance service result" and "CSM" are accounting terms, not coverage terms.
A hypothetical
Say a multinational with U.S. and U.K. operations buys a global liability program led by a London market insurer. The insurer's annual report under IFRS 17 shows insurance revenue, a discounted liability for incurred claims and a risk adjustment. In the U.S. entity's statutory statement, reserves are generally undiscounted. Two analysts reading the same group's results can reach different views of its reserves if they compare the figures without adjusting. The broker or risk manager should ask which entity's capital stands behind the policy and read the rating for that entity.
Key takeaways
- IFRS 17, issued May 2017 and effective for periods beginning on or after 1 January 2023, sets how insurers measure insurance contracts and recognize profit outside the U.S.
- It measures liabilities as the present value of future cash flows plus a risk adjustment and a contractual service margin.
- Short-duration P&C contracts usually use the premium allocation approach.
- U.S. insurers report under U.S. GAAP and state statutory accounting; IFRS 17 reaches U.S. buyers through foreign groups, Lloyd's and reinsurers.
- IFRS 17 does not set capital requirements or change your coverage; compare the entity, its capital and its rating.