One of the next major challenges for insurance companies is the migration to IFRS 17, the stakeholders are to understand the global goals of the standard. This paper is drafted in order to get a global understanding of the standard and a high level summary of its liability measurement methodology.

1. IFRS 17: Insurance Contracts
A. Fataou
Wikitree Europe.
fagondo@wikitree.eua)
(Dated: 27 May 2018)
One of the next major challenges for insurance companies is the migration to IFRS 17, the stakeholders are
to understand the global goals of the standard. This paper is drafted in order to get a global understanding
of the standard and a high level summary of its liability measurement methodology.
Keywords: Insurance/reinsurance contracts, recognition, BBA, PAA, VFA, CSM, IFRS, IASB, Contracts
with participation features.
IFRS (International Financial Reporting Stan-
dards) are accounting rules issued by the Interna-
tional Accounting Standards Board (IASB). The
standards aim at setting global convergence on
practices, creating transparency of public state-
ments disclosed to the open market. IFRS stan-
dards play a major role in the global economy as
it is being adopted by 93% of juridictions world-
wide.
I. IFRS 17
IFRS 17 addresses a standard for the recognition, mea-
surement, presentation and disclosure of insurance con-
tracts. It will to progressively override its interim version
(IFRS 4) and will be mandatory as of January First of
2021. IFRS 17 attempts to correct many current gaps
that have been faced using IFRS 4. A main shortcoming
of IFRS 4 consists in the fact that it does not allow for
enough standardisation of practices. The new standard
is foreseen to correct this gap and improve consistency of
financial statements disclosed by companies.
A. Scope
The standard applies to:
• Insurance contracts, including reinsurance con-
tracts, it issues;
• Reinsurance contracts it holds; and
• Investment contracts with discretionary participa-
tion features it issues, provided the entity also is-
sues insurance contracts.
Some insurance contracts may have some embbebed
features falling out of its scope. The practitioner must
refer to IFRS 9 and IFRS 15 to adequately separate such
features of the host insurance contracts and to account
them.
a)Also at Wikitree Europe.; http://www.wikitree.eu
B. Measurement
IFRS 17 defines a general method for estimation of li-
abilities of all insurance contracts without participation
features: The Building Block Approach (BBA).
This general approach is simplified for a certain cate-
gory of contracts (mostly Non-life contracts). The sim-
plified approach is referred to as Premium Allocation
Approach (PAA). Last, the BBA is modified for con-
tracts with paticipation features, namely the Variable
Fee approach (VFA)
1. The Building Block Approach
FIG. 1. Building Block Approach Overview.
At inception, the value of the liabilities for a group
of insurance contracts is measured as the sum of the
Fulfillment Cash Flows (FCF) and the Contractual
Service Margin (CSM). The FCF includes the first three
building blocks as displayed in FIG. 1. Therefore, we
can state:
FCF = I + II + III.
Assumptions for estimating the Fair value (FV) of FCF
are set within the standard. Widely speaking:
• The practionner must account for all scenarios in
an unbiased way
• Assumptions must be current

2. 2
• Assumptions must be explicit
• Only contracts within the boundaries of the insur-
ance contract must be taken into account
An adjustment of the liabilities must be assessed in the
third block (see FIG. 1). The adjustement allows to ac-
count for the non-financial risks in the same conceptual
way as Risk Margin in Solvency II directives. However,
although Solvency II suggests a cost of capital based ap-
proach, no specific method is imposed under IFRS 17.
The CSM (block IV) represents in a nutshell the
unearned profit progressively released during the lifetime
of the contract. At inception of an insurance contract,
we can define the CSM as follows:
CSM = -Max{FCF,0}
A negative value of the FCF suggests the contracts
shall be profitable. However, companies can not recog-
nise as a profit until the passage of risk/time. In this case
the CSM allows to expunge a day one fictitious benefit.
However in adverse situations (negative FCF → non prof-
itable contracts), the companies are to recognise a loss at
inception and report it in the P&L. Such contracts (FCF
< 0) are referred to as onerous contracts.
On subsequent measurement, the carrying liability for
a group of contracts is given by the sum of the liabili-
ties for remaining coverage on the one hand and of the
incurred claims on the other hand.Widely speaking, it is
given by:
FCF(future services) + CSM
liability for remaining coverage
+ FCF(past services)
incurred claims
Subsequently, the carrying amount of the CSM is as-
sessed as described in the figure below:
FIG. 2. Contractual Service Margin subsequent mea-
surement.
Furthermore:
• An unfavourable change in the present/previous es-
timation of FCF (future services) can not be such
that it results into a negative CSM.
2. The Premium Allocation Approach
Some insurance contracts are eligible to a simplifica-
tion of the general BBA approach, namely the Premium
Allocation Approach (PAA). This simplified method is
not mandatory. Contracts are eligible to the PAA in the
following cases:
• The entity can show liabilities would not materially
differ from the BBA approach
• Or the contract boundary is one year or less
We summarize the PAA measurement approach in the
following:
FIG. 3. Premium Allocation Approach measurement.
Furthermore:
• The BBA becomes mandatory subsequently for es-
timating the liabilities for incurred claims.
• For contracts having less than one year boundary,
the entity is allowed to directly recognise the ac-
quisition cost into the P&L.
• Adjustements for financing risks is necessary if the
contracts have a non-negligible financing compo-
nent unless the contract has less than one year
boundary.
C. Building insurance contracts groups
Before applying any measurement method, the entity
has to segregate contracts into groups and measure the
liabitily per groups. An entity shall divide a portfolio
of insurance contracts issued into a minimum of three
sparate groups:

3. 3
• A group of contracts that are onerous at initial
recognition, if any;
• A group of contracts that at initial recognition have
no significant possibility of becoming onerous sub-
sequently, if any; and
• A group of the remaining contracts in the portfolio,
if any.
An entity shall not include contracts issued more than
one year apart in the same group.
sources:
https://www.idc.ac.il/he/specialprograms/
accounting/fvf/Documents/IFRS17/WEBSITE155.pdf
https://www.ifrs.org/-/media/feature/
around-the-world/documents/pocket-guide-2017.
pdf
http://www.actuaries.org/CTTEES_INSACC/
Documents/Chicago_Oct2017/4a_EPS_IAN_
Introduction_Sept2017.docx