arise from those reinsurance contracts or other financial instruments, and the cash flows
that would arise as the entity fulfils the underlying contracts with the policyholder.
Many insurance contracts have features that enable policyholders to take actions that
change the amount, timing, nature or uncertainty of the amounts they will receive. Such
features include renewal options, surrender options, conversion options and options to
stop paying premiums while still receiving benefits under the contracts. The
measurement of a group of insurance contracts should reflect, on an expected value
basis, the entity’s current estimates of how the policyholders in the group will exercise
the options available, and the risk adjustment for non-financial risk (see 8.4 below)
should reflect the entity’s current estimates of how the actual behaviour of the
policyholders may differ from the expected behaviour. This requirement to determine
the expected value applies regardless of the number of contracts in a group; for example
it applies even if the group comprises a single contract. Thus, the measurement of a
group of insurance contracts should not assume a 100 per cent probability that
policyholders will: [IFRS 17.B62]
• surrender their contracts, if there is some probability that some of the
policyholders will not; or
• continue their contracts, if there is some probability that some of the policyholders
will not.
It is observed in the Basis for Conclusions that IFRS 17 does not require or allow the
application of a deposit floor when measuring insurance contracts. If a deposit floor
were to be applied the resulting measurement would ignore all scenarios other than
those involving the exercise of policyholder options in the way that is least
favourable to the entity. This would contradict the principle that an entity should
incorporate in the measurement of an insurance contract future cash flows on a
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probability-weighted basis. [IFRS 17.BC166]. The expected cash outflows include
outflows over which the entity has discretion. [IFRS 17.BC168]. The Board considered
whether payments that are subject to the entity’s discretion meet the definition of a
liability in the Conceptual Framework for Financial Reporting (the Conceptual
Framework). The contract, when considered as a whole, clearly meets the
Conceptual Framework’s definition of a liability. Some components, if viewed in
isolation, may not meet the definition of a liability. However, in the Board’s view,
including such components in the measurement of insurance contracts would
generate more useful information for users of financial statements. [IFRS 17.BC169].
IFRS 17 identifies two types of variables that can affect estimates of cash flows:
[IFRS 17.B42]
• market variables (i.e. variables that can be observed in, or derived directly from
markets (for example, prices of publicly traded securities and interest rates)); and
• non-market variables (i.e. all other variables, such as the frequency and severity of
insurance claims and mortality).
Market variables will generally give rise to financial risk (for example, observable
interest rates) and non-market variables will generally give rise to non-financial risk (for
example, mortality rates). However, this will not always be the case, there may be
assumptions that relate to financial risks for which variables cannot be observed in, or
derived directly from, markets (for example, interest rates that cannot be observed in,
or derived directly from, markets). [IFRS 17.B43]. Market variables and non-market
variables are discussed at 8.2.4.A and 8.2.4.B respectively, below.
8.2.1
Cash flows within the contract boundary
Cash flows within the boundary of an insurance contract are those that relate directly
to the fulfilment of the contract, including cash flows for which the entity has discretion
over the amount or timing.
IFRS 17 provides the following examples of such cash flows: [IFRS 17.B65]
• premiums – see 8.2.1.A below;
• payments, including claims, to a policyholder – see 8.2.1.B below;
• payments to a policyholder that vary based on underlying items – see 8.2.1.C below;
• payments to a policyholder resulting from derivatives – see 8.2.1.D below;
• insurance acquisition cash flows – see 8.2.1.E below;
• claims handling costs – see 8.2.1.F below;
• costs incurred in providing contractual benefits in kind – see 8.2.1.G below;
• policy administration and maintenance costs – see 8.2.1.H below;
• transaction-based taxes and levies – see 8.2.1.I below;
• payments by the insurer of tax in a fiduciary capacity – see 8.2.1.J below;
• potential cash inflows from recoveries – see 8.2.1.K below;
• an allocation of fixed and variable overheads – see 8.2.1.L below; and
• any other costs specifically chargeable to the policyholder – see 8.2.1.M below.
Insurance contracts (IFRS 17) 4485
The list of examples of cash flows within the boundary of an insurance contract is more
extensive than permitted under many local GAAPs (and hence applied previously
under IFRS 4). For example, some local GAAP’s permit only incremental costs to be
included. Some local GAAPs also permit entities an accounting policy choice in whether
or not to treat certain costs as insurance acquisition cash flows (and hence deferred over
the policy period). IFRS 17 does not allow a choice as to whether or not to include these
cash flows that are within the boundary of the insurance contract.
The Board decided not to include only insurance cash flows that are incremental at a
contract level because that would mean that entities would recognise different
contractual service margins and expenses depending on the way they structure their
acquisition activities. [IFRS 17.BC182(a)]. For example, there would be different liabilities
reported if the entity had an internal sales department rather than outsourcing sales to
external agents because the costs of an internal sales department, such as fixed salaries,
are less likely to be incremental than amounts paid to an agent.
At initial recognition of an insurance contract, the fulfilment cash flows will include
estimates for these cash flows. Subsequently, as services are provided under the contract,
the liability for remaining coverage is reduced and insurance revenue is recognised except
for those changes that do not relate to services provided in the period (premiums received,
investment component changes, changes related to transaction-based taxes, insurance
finance income or expenses, and insurance acquisition cash flows) – see 15.1 below.
8.2.1.A
Premium cash flows
Premium cash flows include premium adjustments and instalment premiums from a
policyholder and any additional cash flows that result from those premiums.
8.2.1.B
Payments to (or on behalf of) a policyholder
These payments include claims that have already been reported but have not yet been
paid (i.e. reported claims), incurred claims for future events that have occurred but for
which claims have not been reported (i.e. incurred but not reported or IBNR claims) and
all future claims fo
r which an entity has a substantive obligation.
8.2.1.C
Payments to (or on behalf of) a policyholder that vary depending on
returns on underlying items
Some insurance contracts give policyholders the right to share in the returns on
specified underlying items. Underlying items are items that determine some of the
amounts payable to a policyholder. Underlying items can comprise any items; for
example, a reference portfolio of assets, the net assets of the entity, or a specified subset
of the net assets of the entity. [IFRS 17 Appendix A].
Payments to policyholders that vary depending on returns from underlying items are found
most frequently in contracts with participation features. These are discussed at 11 below.
8.2.1.D
Payments to (or on behalf of) a policyholder resulting from derivatives
Examples of such derivatives include options and guarantees embedded into the
contract, to the extent that those options and guarantees are not separated from the
contract (see 4.1 above).
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8.2.1.E Insurance
acquisition cash flows
These cash flows comprise an allocation of insurance acquisition cash flows attributable
to the portfolio to which the contract belongs.
Insurance acquisition cash flows are cash flows arising from the costs of selling,
underwriting and starting a group of insurance contracts that are directly attributable to
the portfolio of insurance contracts to which the group belongs. Such cash flows include
cash flows that are not directly attributable to individual contracts or groups of
insurance contracts within the portfolio. [IFRS 17 Appendix A]. See 8.1.3 above for
acquisition cash flows outside of the contract boundary.
There is no restriction of insurance acquisition cash flows to those resulting from
successful efforts. So, for example the directly attributable costs of an underwriter of a
portfolio of motor insurance contracts do not need to be apportioned between those
costs relating to efforts that result in the issuance of a contract and those relating to
unsuccessful efforts. The Basis for Conclusions observes that the Board considered
whether to restrict insurance acquisition cash flows included in the measurement of a
group of insurance contracts to those cash flows directly related to the successful
acquisition of new or renewed insurance contracts. However, it was concluded that this
was not consistent with an approach that measured profitability of a group of contracts
over the duration of the group and, in addition, the Board wanted to avoid measuring
liabilities and expenses at different amounts depending on how an entity structures its
insurance activities. [IFRS 17.BC183].
Changes in estimates of insurance acquisition cash flows are adjusted against the liability
for remaining coverage but do not adjust insurance revenue as they do not relate to
services provided by the entity. [IFRS 17.B123]. Separately, insurance revenue related to
insurance acquisition cash flows is determined by allocating (or amortising) the portion
of the premiums that relate to recovering these cash flows to each reporting period in a
systematic way on the basis of passage of time with a corresponding entry to insurance
service expenses (i.e. DR insurance service expense, CR insurance revenue).
[IFRS 17.B125]. See 15.1 below.
8.2.1.F
Claims handling costs
These are costs that an entity will incur in investigating, processing and resolving claims
under existing insurance contracts (as opposed to claim payments to policyholders –
see 8.2.1.B above). Claims handling costs include legal and loss adjusters’ fees and the
internal costs of investigating claims and processing claims payments.
8.2.1.G
Costs incurred in providing contractual benefits in kind
These costs are those related to the type of payments in kind discussed at 3.5 above.
8.2.1.H Policy
administration and maintenance costs
These costs include the costs of billing premiums and handling policy changes (for
example, conversions and reinstatements). Such costs also include recurring
commissions that are expected to be paid to intermediaries if a particular policyholder
continues to pay the premiums within the boundary of the insurance contract.
Insurance contracts (IFRS 17) 4487
8.2.1.I Transaction-based
taxes
These include such taxes as premium tax, value added taxes and goods and service taxes
and levies (such as fire service levies and guarantee fund assessments) that arise directly
from existing insurance contracts, or that can be attributed to them on a reasonable and
consistent basis. See also 8.2.1.J below.
Premium or sales taxes are typically billed to the policyholder and then passed onto the
tax authorities with the insurer usually acting as an agent for the tax authorities. The
cash flows within the contract boundary would therefore include both the tax in-flow
and the tax out-flow. Guarantee fund or similar assessments are usually billed to the
insurer directly based on a calculation made by the tax authority often derived from the
insurer’s market share of particular types of insurance business. There is usually only a
cash out-flow for these assessments.
Changes in cash flows that relate to transaction-based taxes collected on behalf of third
parties (such as premium taxes, value added taxes and goods and services taxes) adjust the
liability for remaining coverage but do not adjust insurance revenue as these do not relate
to services expected to be covered by the consideration received by the entity. [IFRS 17.B123].
8.2.1.J
Payments by the insurer in a fiduciary capacity
These are payments (and related receipts) made by the insurer to meet tax obligations of
the policyholder. In some jurisdictions, the insurer is required to make these payments (e.g.
to pay the policyholder’s tax on gains made on underlying items). Income tax obligations
which are not paid in a fiduciary capacity (e.g. the insurer’s own income tax obligations)
are not cash flows within the boundary of an insurance contracts. See 8.2.2 below.
8.2.1.K
Potential inflows from recoveries
Some insurance contracts permit the insurer to sell, usually damaged, property acquired
in settling the claim (salvage). The insurer may also have the right to pursue third parties
for payment of some or all costs (subrogation). Potential cash inflows from both salvage
and subrogation are included with the cash flows of the boundary of an insurance
contract and, to the extent that they do not qualify for recognition as separate assets,
potential cash inflows from recoveries on past claims.
8.2.1.L
An allocation of fixed and variable overheads
Fixed and variable overheads included with the cash flows of the boundary of an
insurance contract include the directly attributable costs of:
• accounting;
• human resources;
• information technology and support;
• building depreciation;
• rent; and
• maintenance and utilities.
These overheads should be allocated to groups of contracts using methods that
are syst
ematic and rational, and are consistently applied to all costs that have
similar characteristics.
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8.2.1.M
Any other costs
These are any other costs specifically chargeable to the policyholder under the
insurance contract.
8.2.2
Cash flows excluded from the contract boundary
Having provided a list of cash flows that are within the boundary of an insurance
contract, IFRS 17 then provides a list of cash flows that should not be included when
estimating the cash flows that will arise as an entity fulfils an existing insurance contract.
These are as follows:
• investment returns. Investments are recognised, measured and presented separately;
• cash flows (payments or receipts) that arise under reinsurance contracts held.
Reinsurance contracts held are recognised, measured and presented separately;
• cash flows that may arise from future insurance contracts, i.e. cash flows outside
the boundary of existing contracts (see 8.2.1 above);
• cash flows relating to costs that cannot be directly attributed to the portfolio of
insurance contracts that contain the contract, such as some product development
and training costs. Such costs are recognised in profit or loss when incurred;
• cash flows that arise from abnormal amounts of wasted labour or other resources that
are used to fulfil the contract. Such costs are recognised in profit or loss when incurred;
• income tax payments and receipts the insurer does not pay or receive in a fiduciary
capacity. Such payments and receipts are recognised measured and presented
separately applying IAS 12;
• cash flows between different components of the reporting entity, such as
policyholder funds and shareholder funds, if those cash flows do not change the
amount that will be paid to the policyholders; and
• cash flows arising from components separated from the insurance contract and
accounted for using other applicable IFRSs (see 4 to 4.3 above).
8.2.3
Market and non-market variables
As discussed at 8.2 above, IFRS 17 identifies two types of variables that can affect
estimates of cash flows: market variables and non-market variables.
8.2.3.A Market
variables
Market variables are variables that can be observed in, or derived directly from markets
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 887
