IFRS 17 Insurance Contracts: Strategic and operational impacts

Aug 21, 2019
Audit Financial reporting International standards Technical accounting

Insurance contract portfolios

To assess the impact of IFRS 17 on profitability and capital, the first step is to identify the unit of measurement. While IFRS 4 Insurance Contracts set out presentation and disclosure requirements, IFRS 17 additionally sets out new measurement requirements. The accounting concept of the insurance contract portfolio is introduced and defined as contracts subject to similar risks and managed together. Contract groups within portfolios are identified as the unit of measurement. Although three types of contract groups are defined by the standard, insurers are choosing the onerous contract group; and the other contracts group for measurement. For the third group, no significant possibility of becoming onerous has been found to have limited applicability in discussions with IFRS 17 industry working groups. Strategic impacts could be felt due to requirements to separately disclose onerous contracts. For example, in the past, insurers looking to price products at a discount may have been able to offset loss-making contracts with profitable books of business. However, under IFRS 17, onerous contract groups cannot be offset against other contract groups in the financial statements disclosures, which in turn may require more explanation to stakeholders and users of financial statements.

Acquisition costs

Strategic impacts could arise from acquisition costs treatment. The new standard requires acquisition costs to be deferred under the General Measurement Model (GMM) and provides an accounting policy choice of deferral or expense under the Premium Allocation Approach (PAA). The June 2019 exposure draft (ED) introduces guidance allowing deferral of acquisition costs beyond the current coverage period for insurance contract renewals instead of amortizing within the current period. Insurers who have a growth-oriented strategy may benefit in the current period from deferring significant acquisition costs to future renewal periods.

Measurement models

Assessing the strategic and operational impact of adopting the General Measurement Model (GMM) and Premium Allocation Approach (PAA) should one of the early business impact assessments undertaken by insurers in their IFRS 17 transition projects. The GMM and PAA accounting models may impact reported profit previously reported under IFRS 4. For example:

  • Certain types of term products exhibit different profit emergence patterns when measured under the GMM compared to the current methodology under IFRS 4
  • Depending on how the RA is modelled, the release of the RA into the statement of income could differ under IFRS 17
  • Changes in the amounts and types costs included as inputs (e.g. acquisition costs, claims and policy expenses) can impact direct and reinsurance contributions to profit emergence over time
  • The IFRS 17 requirement to recognize onerous contract groups separately from other contract groups under both the GMM and PAA can accelerate the timing of loss recognition

Management should re-examine the profit emergence patterns created by IFRS 17 implementation early in the conversion process to determine if any immediate pricing changes are required. 

Asset liability matching strategy

The asset liability matching strategy is of critical importance when managing the profitability and capital of an insurance enterprise. IFRS 17 and IFRS 9 Financial Instruments have a combined and related impact on the statement of income and financial position. For example the new IFRS 17 discount rate for discounting insurance liabilities may no longer sufficiently match the directionality or magnitude of the change in the value of the assets held that fund the insurance liability. This can cause a mismatch or disconnect between investment income and insurance finance expenses. This can be further complicated by complex investment classifications under IFRS 9.


Another important driver of profit emergence and capital is reinsurance. Although the measurement themes are similar for reinsurance held compared to direct insurance issued, IFRS 17 modifies the GMM and PAA measurement models for reinsurance contracts held. For example, reinsurance contracts held are required to be aggregated into their own separate portfolios and groups for measurement that may not necessarily align with the underlying insurance contracts. Additionally, the ED introduces new requirements to recognize gains on proportionate reinsurance held when the underlying insurance contracts are initially issued as onerous. Applying the requirements for reinsurance measurement may be further complicated by the number of legacy reinsurance contracts that are held and the diversity of types of reinsurance arrangements. It’s not uncommon for insurers to have to look back decades to determine what reinsurance portfolios and groups exist under IFRS 17.

Capital and strategy

The capital plan often restrains strategic objectives. Due to the reductions in opportunities for offsetting profitable and onerous contracts, changes to the timing of profit recognition for onerous contracts and changes to the liability discount rate, insurers may experience increased sensitivity to adverse events and require more capital under IFRS 17. Insurance portfolios that were otherwise expected to be profitable in the company’s financial plan may become unprofitable in an adverse scenario, resulting in the immediate recognition of losses and reduction in available capital. Furthermore, the new discount rate calculation approach under IFRS 17 is likely to increase required capital as the mismatch between interest rate-sensitive assets and liabilities increases. Insurers should consider the potential increased sensitivity to adverse scenarios as they adapt their capital adequacy assessment processes and capital management policies to the new standard.

RSM contributors

  • Canadian Insurance Audit Leader
    Liam Neilson
    Canadian Insurance Audit Leader

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