← Back to IFRS 17 Insurance Contracts for Beginners

Comparing the Models (Which one do I use?)

You now have the ultimate IFRS 17 toolbox. With a heavy-duty engine, light-duty shortcut, specialized investment model. As a finance professional, you would take a look at some new insurance products and choose the proper accounting model.

Use a logical decision tree for navigating the standard. When an insurance company launches a new product, the accounting department will vet it through following questions.:

Question 1: Does the contract meet the definition of a Direct Participating Contract?

Is there a direct connection to a pool of assets, and will the customer receive a significant portion of returns?

  • If YES: You must use the Variable Fee Approach (VFA). You have no choice. The CSM will absorb financial market shocks. (Common examples: Unit-linked life insurance, participating retirement annuities).
  • If NO: Move to Question 2.

Question 2: Is the coverage period of the contract exactly one year or less?

  • If YES: You are highly encouraged to use the Premium Allocation Approach (PAA). It is an optional shortcut, but 99% of companies will take it because it saves millions of dollars in actuarial accounting costs. You skip the complex Day-1 calculations and recognize premiums in a straight line. (Common examples: 1-year auto insurance, 6-month travel insurance, annual home insurance).
  • If NO: Move to Question 3.

    • Question 3: Does the contract fail the PAA eligibility test?

    If the contract is 5 years long, you can only use the PAA if you can mathematically prove the results will be identical to the standard model. If you cannot prove that, the shortcut is illegal.

    If it fails: You must use the default General Measurement Model (GMM). You will build all four blocks: Cash Flows, Discounting, Risk Adjustment, and the CSM. The CSM will not absorb financial market shocks. (Common examples: 10-year term life insurance, long-term disability insurance without investment links).

    You have conquered the basic concepts of IFRS 17 with success! You know how to define a contract, how to group it, and exactly which mathematical engine to use to calculate its value. In the fifth and final chapter, we will look at how the huge volume of financial data is ultimately presented to the public through financial statements.

      Next