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24Insurance accounting used to be a global puzzle where every country used different rules. In this chapter, you will learn why IFRS 17 was created to fix this, and how to officially identify what counts as an insurance contract.
The End of IFRS 4 (Why do we need a new standard?)
The Problem with IFRS 4
The Timing of Profit
The Day 1 Profit Rule
Profit Allocation Calculation
What is an Insurance Contract?
Defining the Risk
Timing Risk
Identifying the Reinsurance Contract
IFRS 17 Contracts
Scope and Exemptions (Who gets a free pass?)
Scope and Exemptions
Employee Benefits Exemption
The Exemption Rule
Fixed-Fee Service Choice
Envision an insurance company that sells millions of policies. They cannot do the accounting for every single person but at the same time, they cannot pool them all into one. In this chapter, you will learn how to limit the scope of a single contract and the strict rules used to group contracts so that companies cannot hide loss-making policies behind profitable ones.
Separating and Combining Contracts (Setting the Boundary)
Unbundling Distinct Services
Combining Contracts
Unbundling Calculation
Bundling Calculation
Portfolios (The Broad Category)
Defining a Portfolio
Similar Risks Test
Sorting the Portfolio Calculation
Segregating Management Lines
Profitability Groups and Annual Cohorts (The Final Buckets)
The Profitability Buckets
The Time Limit
Identifying the Onerous Group
The Annual Cohort Rule
Now that we’ve placed our contracts in the correct buckets, how do we calculate the financial value of these contracts? In this chapter, you will be introduced to the General Measurement Model (also known as the Building Block Approach). Every accountant applies four clear logical building blocks to value an insurance contract from the day the contract is signed until it is cleared. You will learn those four building blocks
The First Two Blocks (Cash Flows & Time Value)
Allowed Cash Flows
The Purpose of Discounting
Calculating the Raw Cash Flows
The Present Value Calculation
The Risk Adjustment (The "Sleep Well at Night" Premium)
The Risk Adjustment
Financial vs Non-Financial
Risk Adjustment Addition
Catastrophic Risk Calculation
The Contractual Service Margin (The Profit Bucket)
The CSM Rule
The Onerous CSM
The Onerous Contract Test
Amortizing the Profit
Though the General Measurement Model is brilliant, it is very costly and complex to compute. What if you offer a straightforward one-year car insurance? What if you sell ULIPs, which is essentially life insurance that gets linked to the stock market? In this chapter, you will learn that there are two alternative models of IFRS 17: The Premium Allocation Approach (The Shortcut) and the Variable Fee Approach (The Investment Link).
The Premium Allocation Approach (PAA) – The Shortcut
The PAA Eligibility
LRC vs. LIC
Calculating PAA Revenue
Day 1 LRC Calculation
The Variable Fee Approach (VFA) – The Investment Link
The Purpose of the VFA
The Shock Absorber
The CSM Movement in VFA
Negative VFA Shock
Comparing the Models (Which one do I use?)
VFA Exclusivity
GMM Default
The Eligibility Decision
Filtering PAA Policies
We have defined the contracts, grouped them, and calculated their exact financial value. But how do we show this to the world? In this final chapter, you will learn how IFRS 17 radically cleans up the Balance Sheet, redefines Revenue on the Income Statement, and sets the rules for how companies must transition from the old standards to the new ones.