LESSON 8: PFRS 17 Insurance

Contracts

I. Description
This module discusses the basic concepts of IFRS/ PFRS 17.

II. Objectives
After completing the module, the students are expected to:

• State the scope and applicability of PFRS 17.

• Describe the level of aggregation and measurement of insurance contracts.

III. Learning Contents

IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure
of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that
an entity provides relevant information that faithfully represents those contracts. This information
gives a basis for users of financial statements to assess the effect that insurance contracts have
on the entity's financial position, financial performance and cash flows.

IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on or after 1
January 2023.

Sept 2001 Added to the IASB's

agenda
Sept 2004 Insurance Working Group Fresh start on the project
appointed
May 3, 2007 Discussion Paper Comment deadline 16
Preliminary Views on November 2007
Insurance Contracts
published
Jul 30, 2010 Discussion Paper Comment deadline 30
Preliminary Views on November 2010
Insurance Contracts
published
2010, 4th quarter Roundtables Comment deadline 25
October 2013
June 30, 2013 ED/2013/7 Insurance Effective for annual periods
Contracts published beginning on or after 1

Objective

IFRS 17 Insurance Contracts establishes the principles for the recognition, measurement,
presentation and disclosure of Insurance contracts within the scope of the Standard. The objective
of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those
 January 2021 2023 (see
below)
May 18, 2017 IFRS 17 Insurance Contracts The amendments, which
published include a deferral of the
effective date of the
standard, are effective for
annual periods beginning on
or after 1 January 2023
June 25, 2020 Amended by Amendments to
IFRS 17
contracts. This information gives a basis for users of financial statements to assess the effect that
insurance contracts have on the entity's financial position, financial performance and cash flows.
[IFRS 17:1]

Scope

An entity shall apply IFRS 17 Insurance Contracts to: [IFRS 17:3]

• Insurance contracts, including reinsurance contracts, it issues;

• Reinsurance contracts it holds; and
• Investment contracts with discretionary participation features it issues provided the entity
also issues insurance contracts.

Some contracts meet the definition of an insurance contract but have as their primary purpose
the provision of services for a fixed fee. Such issued contracts are in the scope of the standard,
unless an entity chooses to apply to them IFRS 15 Revenue from Contracts with Customers and
provided the following conditions are met: [IFRS 17:8]

(a) the entity does not reflect an assessment of the risk associated with an individual customer
in setting the price of the contract with that customer;

(b) the contract compensates the customer by providing a service, rather than by making cash
payments to the customer; and

(c) the insurance risk transferred by the contract arises primarily from the customer’s use of
services rather than from uncertainty over the cost of those services.

Key definitions
[IFRS 17: Appendix A]

Insurance contract

A contract under which one party (the issuer) accepts significant insurance risk from another party
(the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event
(the insured event) adversely affects the policyholder.

Portfolio of insurance contracts

Insurance contracts subject to similar risks and managed together.

Contractual service margin

A component of the carrying amount of the asset or liability for a group of insurance contracts
representing the unearned profit the entity will recognise as it provides services under the
insurance contracts in the group.

Insurance risk

Risk, other than financial risk, transferred from the holders of a contract to the issuer.

Fulfilment cash flows

An explicit, unbiased and probability-weighted estimate (i.e. expected value) of the present value
of the future cash outflows less the present value of the future cash inflows that will arise as the
entity fulfils insurance contracts, including a risk adjustment for non-financial risk.

Risk adjustment for non-financial risk

The compensation an entity requires for bearing the uncertainty about the amount and timing of
the cash flows arising from non-financial risk as the entity fulfils insurance contracts.

Essential Elements in an Insurance Contract

a. Transfer of significant insurance risk – there is a transfer of significant insurance risk from
the insured (policyholder) to the insurer (insurance provider).

b. Payment from the insured (premium) – generally, the insured pays to a common fund from
which losses are paid. However, not all insurance contracts have explicit premiums (e.g.,
insurance cover bundled with some credit card contracts).

c. Indemnification against loss – the insurer agrees to indemnify the insured or other
beneficiaries against loss or liability from specified events and circumstances (i.e., insured
event) that may occur or be discovered during a specified period.

Significant Insurance Risk

• Risk (uncertainty) is an essential element of an insurance contract. Risk is the possibility

of loss or injury when an uncertain future event occurs.

• Insurance risk – is “risk, other than financial risk, transferred from the holder of a contract
to the issuer.”

• A contract that transfers only an insignificant insurance risk is not an insurance contract.

• A contract that exposes the issuer to financial risk is not an insurance contract, unless it
also exposes the issuer to significant insurance risk.

Examples of Insurance Contracts

a. Insurance against theft or damage.

b. Insurance against product liability, professional liability, civil liability or legal expenses.
c. Life insurance and prepaid funeral plans.
d. Life-contingent annuities and pensions.
e. Disability and medical cover.
f. Surety bonds, fidelity bonds, performance bonds and bid bonds.
g. Product warranties issued by another party for goods sold by a manufacturer, dealer or
retailer. Product warranties issued directly by a manufacturer, dealer or retailer are outside
the scope of PFRS 17.
h. Title insurance.
i. Travel insurance.
j. Insurance swaps and other contracts that require a payment depending on changes in
physical variables that is specific to a party to the contract. (PFRS 17.B26)

The following are examples of items that are not insurance contracts:
a. Contracts that do not transfer significant insurance risk to the issuer.
b. Self-insurance.
c. Gambling contracts
d. Derivatives that expose a party to financial risk but not insurance risk, including weather
derivatives.
 e. Credit-related guarantees (e.g., letter of credit, credit derivative default contract or credit
insurance contract) that require payments even if the holder has not incurred a loss on the
failure of the debtor to make payments when due. (PFRS 17.B27)

Types of Insurance Contracts

a. Direct insurance contract – an insurance contract where the insurer directly accepts risk
from the insured and assumes the sole obligation to compensate the insured in case of a
loss event.
b. Reinsurance contract – an insurance contract issued by one insurer (the reinsurer) to
compensate another insurer (the cedant) for losses on one or more contracts issued by
the cedant.
• Reinsurer – the party that has an obligation under a reinsurance contract to
compensate a cedant if an insured event occurs.
• Cedant – the policyholder under a reinsurance contract.

Separating Components from an Insurance Contracts

An insurance contract may contain one or more non-insurance components (e.g., investment
component and/or service component) that need to be separated and accounted for under other
Standards. For this purpose, an entity applies PFRS 9 to separate an embedded derivative or a
distinct investment component from a host insurance contract and applies PFRS 15 to allocate
the cash flows to the separated components.

Level of Aggregation of Insurance Contracts

Insurance contracts are combined into portfolios. A portfolio consists of insurance contracts with
similar risks and managed together (e.g., contracts within a product line). Each portfolio is then
further subdivided into the following groups:

a. a group of contracts that are onerous at initial recognition, if any;

b. a group of contracts that at initial recognition have no significant possibility of becoming
onerous subsequently, if any; and
c. a group of the remaining contracts in the portfolio, if any. (PFRS 17.16)

Accounting Models

PFRS 17 prescribes the following measurement models:

a. General model

Recognition (PFRS 17.25)

A group of insurance contracts is recognized from the earliest of the following:

a. the beginning of the coverage period of the group of contracts;
b. the date when the first payment from a policyholder in the group becomes due;
and
c. for a group of onerous contracts, when the group becomes onerous.

A group of insurance contracts is initially measured at the total of

a. the fulfillment cash flows, and
b. the contractual service margin

Fulfillment cash flows comprise the following:

a. Estimates of future cash flows, which include all future cash flows within the
boundary of each contract in the group. Estimates may be determined at a higher
level of aggregation and then allocated to individual groups of contracts.
 b. Adjustment for time value of money and financial risks (if financial risks are not
included in the estimates of future cash flows).

c. Risk adjustment for non-financial risk.

Contractual Service Margin

The contractual service margin is the unearned profit in a group of insurance contracts that the
entity recognizes as it provides services in the future.

The carrying amount of a group of insurance contracts at the end of each reporting period is the
sum of:

a. the liability for remaining coverage comprising:

i. the fulfilment cash flows related to future service allocated to the group at
that date;
ii. the contractual service margin of the group at that date; and

b. the liability for incurred claims, comprising the fulfilment cash flows related to past service
allocated to the group at that date.

Onerous Contract

• An insurance contract is onerous if the total of its fulfillment cash flows, any previously
recognized acquisition cash flows and any cash flows arising from the contract at initial
recognition date is a net outflow. The net outflow is recognized as a loss in profit or loss.
This results to a carrying amount of the liability for the group equal to the fulfilment cash
flows and a zero contractual service margin.

• On subsequent measurement, any excess net outflow for a group of insurance contracts
that becomes onerous or more onerous is recognized in profit or loss.

b. Premium allocation approach (PFRS 17.53)

PFRS 17 allows a simplified measurement of a group of insurance contracts (called

‘premium allocation approach’) if at the group’s inception:

a. the entity reasonably expects that the simplification would result to an

approximation of the general model; or
b. the coverage period of each contract in the group is one year or less.

Initial measurement (PFRS 17.55)

Under the premium allocation approach, the liability is initially measured at:
a. the premiums received at initial recognition, if any;
b. minus any insurance acquisition cash flows at that date, unless the entity chooses
to recognize the payments as an expense; and
c. plus or minus any amount arising from the derecognition at that date of the asset
or liability recognized for insurance acquisition cash flows.

Subsequent measurement (PFRS 17.55)

At the end of each subsequent reporting period, the carrying amount of the liability is the carrying
amount at the start of the reporting period:

a. plus the premiums received in the period;

b. minus insurance acquisition cash flows, unless the entity chooses to recognize the
payments as an expense;
 c. plus any amounts relating to the amortization of insurance acquisition cash flows
recognized as an expense in the reporting period, unless the entity chooses to
recognize insurance acquisition cash flows as an expense;
d. plus any adjustment to a financing component;
e. minus the amount recognized as insurance revenue for coverage provided in that
period; and
f. minus any investment component paid or transferred to the liability for incurred
claims.

c. Modifications to the General model for:

i. Onerous contracts,
ii. Reinsurance contracts held, and
iii. Investment contracts with discretionary participation features.

Reinsurance Contracts Held

Initial measurement:

• Estimates of future cash flows include the risk of the reinsurer’s non-performance.

• The risk adjustment for non-financial risk is determined in such a way that it depicts the
transfer of risk from the holder of the reinsurance contract to the reinsurer.

• The contractual service margin is regarded as a net gain or loss on purchasing the
reinsurance, rather than an unearned profit.

Subsequent measurement:

Changes in the fulfilment cash flows resulting from changes in the reinsurer’s risk of
nonperformance do not adjust the contractual service margin but rather recognized in profit or
loss.

Derecognition

An insurance contract is derecognized when:

a. it is extinguished, i.e., when the obligation in the insurance contract expires or is

discharged or cancelled; or
b. the contract is modified and the modification meets any of the conditions for
derecognition.

Presentation

Statement of financial position

The carrying amounts of the following groups are presented separately in the statement of
financial position:

a. insurance contracts issued that are assets;

b. insurance contracts issued that are liabilities;
c. reinsurance contracts held that are assets; and
d. reinsurance contracts held that are liabilities.

Statement(s) of financial performance

The amounts recognized in the statement(s) of profit or loss and other comprehensive income
are disaggregated into to the following:
 a. insurance service result, comprising insurance revenue and insurance service
expenses; and

b. insurance finance income or expenses.

V. References
• Conceptual Frameworks and Accounting Standards, 2019 Edition by Zeus Vernon B.
Millan
• IFRS/ PFRS 17 – Insurance Contracts
• https://www.iasplus.com/en/standards/ifrs/ifrs-17