IFRS 17 reporting: Disclosures and KPIs

Each portfolio of insurance contracts is either an asset or a liability. Classification depends on the portfolio’s carrying amount, including the CSM. Asset and liability portfolios are not offset against each other. IFRS 17.78 Reinsurance held is tested the same way and shown on separate lines.

A profitable portfolio starts with a balance of zero, because CSM represents the expected profit. If the insurer pays a large commission at sale, the commission is already paid but the premiums that cover it are still to come. The balance is then an asset. Premiums due but not yet received also push the balance towards an asset.

In IFRS 17 financial statements, the reserves are the insurance contract liabilities. There is no line item called reserves. The notes break these liabilities down in two ways:

• Liability for remaining coverage (LRC) and liability for incurred claims (LIC). IFRS 17.100
  • The LRC covers insured events expected to happen in the future. Life policy reserves under local accounting rules are part of the LRC.
  • The LIC covers events that have already happened. Claims reserves (IBNR, RBNS) are part of the LIC.
• Best estimate of future cash flows, risk adjustment and CSM. IFRS 17.101

IFRS 17 liabilities include the expected future profit, held in the CSM. Solvency II and the Swiss Solvency Test (SST) have no CSM and count most future profit as capital. Statutory reserves use cautious, fixed assumptions and drive tax and profit sharing. The CSM is the main reason IFRS 17 equity differs from Solvency II or SST capital.

An investment component is the amount an insurance contract requires the insurer to repay to the policyholder in all circumstances, whether or not an insured event occurs. IFRS 17 Appendix A The surrender value is a common starting point, but it is not a universal rule. The contract terms decide. For example, a policy has a fund of 10,000, paid out on surrender, maturity or death, and a death benefit of 12,000. On death, 10,000 is the investment component and 2,000 is the insurance claim. Investment components are excluded from insurance revenue and insurance service expenses. IFRS 17.85

Most of a savings premium is an investment component, which IFRS 17 excludes from insurance revenue. IFRS 17.85 The money goes onto the balance sheet and is later paid back to the policyholder. Insurance revenue covers only the insurance service, such as expected claims, expenses and the release of the CSM. Premium volume therefore makes a savings business look much larger than a protection business with the same revenue.

Premiums received are in the reconciliation of the liability for remaining coverage in the notes. IFRS 17.105(a)(i) The present value of future premiums from new contracts is in the new business table. IFRS 17.107(b) Present value of new business premiums (PVNBP), gross written premiums (GWP) and annual premium equivalent (APE) are not IFRS 17 figures. Each insurer defines them and publishes them outside the IFRS 17 financial statements, for example in the management report or investor presentations.

The risk adjustment is a margin for uncertainty in future cash flows. IFRS 17 does not prescribe a method, but every insurer must disclose the confidence level its risk adjustment corresponds to. IFRS 17.119 Large European insurers report confidence levels between about 70% and 95%. There are three common methods:

• Cost of capital: The margin is the cost of holding capital against the risk until it runs off, typically at a rate of 6% or 7%.
• Confidence level: The margin is set so the liability is enough with a chosen probability, for example 75%. This is also called Value at Risk.
• Calibration to a capital target: The margin is set to match the insurer's own solvency ratio or capital model.

A higher risk adjustment gives a smaller CSM when new contracts are recognised, because the CSM is the expected profit left after the risk adjustment. IFRS 17.38 The profit is not lost. It comes through later as the risk adjustment is released. If the risk adjustment is larger than the expected profit, the group of contracts is onerous and the loss goes to profit or loss at once. IFRS 17.47

Changes in the risk adjustment go to three places, depending on the service they relate to:

• The release for risk that expired in the period is part of insurance revenue. IFRS 17.B124(b)
• Changes that relate to future service adjust the CSM. IFRS 17.B96(d)
• Changes that relate to past service, such as on incurred claims, go to insurance service expenses.

A closed book takes no new business. Each year, the CSM is released in proportion to the coverage units provided in the year, compared with the coverage units expected over the remaining cover. IFRS 17.B119 As policies mature or lapse, the release often trends down. It does not have to fall every year. Interest accretion and changes in estimates adjust the CSM, and actual lapses and claims change the coverage units. For the same reasons, the release per policy can go up or down.

Not necessarily. Split the CSM release into volume and margin. Volume is the number of coverage units in force. Margin is the release per coverage unit. Falling volume is expected as the book runs off. A falling release per unit means assumption changes or poor experience have reduced the CSM.

Contracts issued more than a year apart are measured in separate groups, so each group's CSM absorbs shocks on its own. IFRS 17.22 In-force business applies the discount rates of its issue year, and usually has little CSM left. The same shock can make an old group onerous while a newer group absorbs it in its CSM. Many insurers measured business written before transition as one block, which aggregates issue years. IFRS 17.C23

A common IFRS-based measure is the change in equity plus CSM, net of tax. In a KPMG study, 16 of 55 insurers disclose equity plus CSM as a value measure. The CSM release is not suitable for this. It only spreads profit over time, so a falling release can hide a good action. For an economic view, insurers use Solvency II or SST own funds or embedded value.

Changes that relate to current or past service go straight to profit or loss. Changes that relate to future service adjust the CSM. IFRS 17.44 IFRS 17.B96 How much of the effect the CSM absorbs depends on the state of the contract groups:

• Large CSM: The CSM absorbs a deterioration and spreads an improvement over the remaining years.
• Small CSM: A deterioration uses up the CSM, and the excess goes to profit or loss as a loss.
• Onerous: An improvement reverses the loss component and goes to profit. A further deterioration is a direct loss.

The effect depends on how long the liabilities run. L&H liabilities often run for decades, so they are very sensitive to interest rates. P&C claims are mostly paid within a few years, except in long-tail lines such as liability. Under the general measurement model (GMM) and the PAA, the effect goes to the insurance finance result, in profit or loss or other comprehensive income (OCI), not to the CSM. IFRS 17.88 Under the variable fee approach (VFA), the insurer's share goes to the CSM. IFRS 17.B113(b) The net effect on equity depends on how well assets match liabilities.

IFRS 17 requires a sensitivity analysis for market risk, including interest rates. IFRS 17.128(a)(ii) Insurers can use their own method instead, such as an economic capital model, if they explain it. IFRS 17.129 Typical shocks are ±50 or ±100 basis points. Some insurers show the effect on IFRS profit and equity. Others show it only on their solvency ratio.

An insurer can use the PAA when each contract in the group covers one year or less. It can also use it for longer contracts if the liability for remaining coverage would not differ materially from the general measurement model (GMM). IFRS 17.53 Most P&C contracts qualify. Reinsurers often use the GMM, because a treaty that covers policies written over a year has a coverage period of more than one year.

There is no CSM under the PAA. The premium is recognised as insurance revenue over the coverage period, usually in line with time. IFRS 17.B126 The profit is the revenue less the claims and expenses of the period. If facts show that a group is loss-making, the insurer recognises the loss at once. IFRS 17.57–58

Under the PAA, the liability for remaining coverage is roughly the unearned premium, which runs off within the year. The liability for incurred claims (LIC) holds claims that have happened but are not yet paid, including those not yet reported. In lines such as liability insurance, these claims take years to settle, so the LIC builds up. It is measured at discounted cash flows plus a risk adjustment. Discounting is optional for claims paid within one year of the claim. IFRS 17.59(b)

Prior-year development is the change in the estimate of claims from earlier years. A release means the earlier reserves were higher than needed and adds to profit. A strengthening is a loss. The change goes directly to insurance service expenses, because it relates to past service. IFRS 17.103(b)(iii) The claims development table in the notes shows it by accident year. IFRS 17.130

No. Insurance revenue reflects the insurance service provided in the period, not the premiums received or written. IFRS 17.83 Investment components are excluded from it. IFRS 17.85 Premiums and gross written premiums are not income statement lines under IFRS 17, but insurers often show them in the management report.

No. Each portfolio of insurance contracts is either an asset or a liability, and the balance sheet shows the two totals separately. IFRS 17.78

The two roll-forwards (LRC-LIC and Cash flow, RA and CSM) must have the same totals and match with the balance sheet. Both show insurance contract assets and liabilities separately at the start and end of the period. IFRS 17.99(b)

Under the variable fee approach (VFA), changes in the insurer’s share of the fair value of underlying items normally adjust the CSM because they relate to future service. IFRS 17.45(b) IFRS 17.B112 Exceptions apply when the risk mitigation option is used, when an adverse change exceeds the available CSM, or when a favourable change reverses a previously recognised loss. IFRS 17.B115 IFRS 17.48 IFRS 17.50(b) The relevant amounts are then recognised in the finance or service result, as applicable. Underlying items are the assets, such as a fund, that determine what policyholders receive.

Coverage units of a contract under the variable fee approach (VFA) should reflect both the insurance service and the investment service. IFRS 17.B119 Coverage units based only on the fund or only on the death benefit miss one of the two. Insurers must disclose how they weigh the two services. IFRS 17.117(c)(v)

No. Value of new business (VNB), operating profit and normalised CSM growth are not defined in IFRS 17. Each insurer defines them itself, so the same name can mean different things at different insurers. Insurers report them as their own measures with a definition.

No. IFRS 17 does not define the combined ratio. Most insurers start from insurance service expenses divided by insurance revenue and then adjust it, for example for reinsurance or for expenses outside the insurance service result. Some discount the claims, others do not. Insurers report it as their own measure with a definition.