IFRS 17 - Insurance Contracts - International Financial Reporting Standards

The International Financial Reporting Standard 17 (IFRS 17) establishes the principles for the accounting, measurement, presentation and disclosure of insurance contracts. This standard was issued by the International Accounting Standards Board (IASB) in May 2017, with the aim of providing a more transparent and consistent representation of the financial situation of insurers globally.

Compared to its predecessor, the IFRS 4IFRS 17 introduces a more rigorous approach, establishing a single, detailed framework that applies to all insurance contracts, regardless of the type of insurance or jurisdiction. The standard's entry into force was originally planned for 2021, but was postponed until 2023 due to the complexity of implementation.

1. Objectives and Fundamental Principles of IFRS 17

IFRS 17 has several key objectives, all of which focus on improving the quality of financial reporting related to insurance contracts. The key principles are:

Transparency: Provide clear and accurate information about future cash flows arising from insurance contracts.
Recognition of income and expenses: Establish that income and expenses must be recognized according to the service provided during the term of the contract, that is, based on the risk assumed and the time elapsed.
Valuation of liabilities under insurance contractsLiabilities should reflect the value of future cash flows, adjusted for risk and the time value of money.

The standard introduces a central concept: the measurement of liabilities for insurance contracts must reflect not only future cash flows, but also the risk adjustment and the time value of money.

2. Main components of IFRS 17

IFRS 17 is structured around three key components for measuring insurance contracts:

2.1 Liabilities from Insurance Contracts

He liabilities from insurance contracts reflects the present value of the insurer's obligations under insurance contracts. Under IFRS 17, this liability is calculated as the sum of expected future cash flows, discounted to their present value, and adjusted for a risk adjustment.

The liability under the insurance contract must include:

Future cash flows: Premiums to be received, claims payments, and associated costs.
Risk adjustment: An estimate of the risk inherent in the insurance contract, that is, the level of uncertainty about future cash flows.

Time value of money: Using an appropriate discount rate to reflect the time value of money.

2.2 Income from Insurance Contract

He income from insurance contract It is recognized over time, based on the coverage provided by the contract. This means that revenue recognition does not occur when the premium payment is received, but rather when the insurer assumes the risk and provides the coverage.

He income It is recognized on a systematic basis, reflecting the service provided, i.e., the time value of the risks assumed by the insurer. The process of measuring revenue involves the distribution of the liability under insurance contract depending on the services provided and the transfer of risk.

2.3 Profit or Loss from Insurance Contracts

The profit or loss The variation derived from insurance contracts is the change in the value of the liabilities and assets associated with the contract. This variation can be broken down into:

Gains or losses from changes in future cash flows: Caused by changes in cash flow expectations, such as changes in premiums or claims.
Gains or losses from risk adjustment: Changes in the risk inherent to the contract, derived from factors such as mortality or accidents.
Gains or losses due to the time value of money: Derived from changes in discount rates applied to reflect the time value of money.

3. Measurement Models for Insurance Contracts under IFRS 17

IFRS 17 introduces three measurement models for liabilities arising from insurance contracts, each appropriate for different types of contracts and risk characteristics. The three models are:

3.1 General Measurement Model (GMM)

He General Measurement Model (General Measurement Model or GMM), also called building block model (Building Block Approach) is the basic model for measuring insurance contract liabilities. It consists of the following components:

Present value of future cash flows: Expected future income and expenses are calculated, adjusted for uncertainty and probability.
Risk adjustment: A risk margin is included, which reflects the uncertainty associated with future cash flows.
Temporary consideration: The effect of time is incorporated by using appropriate discount rates.

The GMM is the most detailed model and applies to most insurance contracts, especially long-term ones.

3.2 Simplified Model (PAA)

He Premium Allocation Approach (PAA) Model It is a simplified model that can be applied to short-term insurance contracts (generally less than one year) or when cash flows are easy to estimate. In this model:

Liabilities are calculated in a simplified manner, without the need to determine the present value of future cash flows.
Revenue recognition is similar to that of a premium received which is distributed systematically throughout the coverage period.

This model can be applied to contracts such as car or health insurance, where cash flows are more predictable and short-term.

3.3 Benefit Sharing Model (VFA)

He Benefit Sharing Model (Variable Fee Approach or VFA) It applies to insurance contracts with profit sharing, such as life insurance contracts linked to mutual funds or unit-of-account funds. This model takes into account both the value of the insurance contract and the share of the returns on the invested funds, so that:

The liability is adjusted by the profit sharing that the insured can obtain from the underlying assets.
The measurement is based on the value of the linked assets and liabilities to profit sharing.

This model is more complex, as it considers the variability of cash flows derived from the underlying assets.

4. Impact of IFRS 17 on the Insurance Industry

The implementation of the IFRS 17 brings with it important implications for the insurance industry:

Greater transparencyThe regulation requires insurers to conduct a more detailed assessment of the liabilities and assets associated with insurance contracts, providing a clearer picture of profitability and risk.
Global consistencyHarmonizing accounting principles across jurisdictions facilitates comparability between insurance companies globally, which can improve investor and regulatory confidence.
Operational and technological challengesThe transition to IFRS 17 requires a significant upgrade of accounting systems, liability measurement processes, and training for accounting teams. Many insurers will need to invest in new technologies and modify their financial reporting processes.

5. Disclosure Requirements under IFRS 17

The disclosure of information is another crucial aspect of the IFRS 17Insurers must provide a detailed description of:

The nature of insurance contracts: Types of contracts, risks assumed, and main characteristics.
The assumptions used: Such as discount rates, mortality, morbidity, etc.
Future cash flows: Premium and claim projections over the life of the contract.
Impact of changes in assumptions: How fluctuations in assumptions affect the measurement of liabilities.

6. How to implement IFRS 17?

Implement the IFRS 17 For an insurance company, it's a complex process that requires careful planning and a series of structured steps to ensure the organization complies with the new accounting requirements. The implementation of this standard not only affects accounting processes, but also IT systems, staff training, measurement processes, and, in general, the way the company manages and presents its insurance contracts.

6.1 Preliminary Assessment and Planning

Before beginning the implementation of IFRS 17, it is essential to conduct a preliminary assessment to understand the scope of the regulatory change and how it will affect the insurer.

6.1.1 Evaluación del Impacto

Review of existing insurance contractsThe first step is to identify all the insurance contracts the company currently holds, classify them by type (life, non-life, profit-sharing, etc.), and assess how they are affected by IFRS 17.
Analysis of current systems and processes: Evaluate current accounting and risk management systems to determine whether they are capable of meeting the new requirements. Certain IT systems may need to be upgraded or replaced to measure future cash flows and calculate liabilities according to IFRS 17 principles.
Review of staff and capabilitiesIt is important to review the capabilities of accounting and actuarial staff. Implementation of IFRS 17 requires an advanced understanding of actuarial and financial models, so specific training may be necessary.

6.1.2 Definición de un Plan de Implementación

Implementation deadlineIFRS 17's effective date is 2023, although many insurers are already working on their transition. Establishing a timeline with interim milestones and a resource plan is key.
Assignment of responsibilities: Designate an implementation team that includes personnel from key areas such as accounting, actuarial, IT, finance, and compliance. This team will be responsible for planning and executing the implementation.

6.2 Design and Development of the Measurement Framework

One of the most technical aspects of implementing IFRS 17 is the measurement of liabilities under insurance contractsIt is essential to understand and apply the three measurement models established by the standard:

6.2.1 Selección del Modelo de Medición

IFRS 17 introduces three measurement models, each of which must be applied to different types of insurance contracts. Depending on the nature of the insurer's contracts, the appropriate model must be selected:

General Measurement Model (GMM)This model is used for most long-term insurance contracts, which involve greater complexity in measuring future cash flows and adjusting for risk.
Simplified Model (PAA)This model is best suited for short-term contracts and can be applied to insurance such as auto, health, and other short-term products.
Benefit Sharing Model (VFA)This model applies to contracts involving profit-sharing, such as life insurance linked to investment funds.

6.2.2 Desarrollo de los Modelos Actuariales

Future cash flowsActuaries must develop models that project future cash flows from insurance contracts, including premiums, claim payments, administrative expenses, and other associated costs.
Discount rate: Establish an appropriate discount rate to discount future cash flows, in accordance with the provisions of IFRS 17. This rate should reflect the time value of money and the risks associated with the contracts.
Risk adjustment: Determine the risk adjustment to be included in the value of liabilities. This adjustment takes into account the uncertainty of future cash flows.

6.3 Implementation of IT and Accounting Systems

Implementation of IFRS 17 will require significant updates to the insurer's accounting and actuarial management systems.

6.3.1 Evaluación de los Sistemas Actuales

Identifying technological gaps: Evaluate whether current actuarial accounting and measurement systems can handle the new requirements of IFRS 17. If not, consider upgrading or purchasing new systems.
Contract Management SystemsIt is essential that systems can manage insurance contracts in detail, recording all the information necessary to apply IFRS 17 calculations, including future cash flows and risk margins.

6.3.2 Integración de Actuariales y Contabilidad

Actuarial and accounting systems must be seamlessly integrated so that the calculations of liabilities, revenues, and profits are consistent. This involves:

Automation of calculation processesInsurers will need to automate calculations of liabilities, revenues, and risk margins in their accounting systems.
Financial reporting interface: Ensure that systems can generate financial reports that comply with the disclosure requirements of IFRS 17, including financial statements and explanatory notes.

6.4 Training and Capacity Building

The implementation of IFRS 17 entails a significant change in internal processes and the way insurance contract accounting is conducted, so it is vital that all key personnel are properly trained.

6.4.1 Formación Interna

Accounting staff: To train accountants on how to apply IFRS 17, especially with respect to the measurement of insurance liabilities, revenue recognition, and the calculation of risk margins.
ActuariesActuaries will also need to understand new methods for estimating future cash flows and adjusting liabilities, as well as how to apply discount rates.
IT and systems: The IT team must be trained in the systems needed to integrate actuarial calculations with accounting and financial processes.

6.4.2 Consultoría Externa

Support may be needed specialized external consultants in IFRS 17, especially in the initial stages of implementation, to ensure that all the technical requirements of the standard are met.

6.5 Execution and Pilot Testing

Once the actuarial models have been designed, the systems have been updated, and the staff has been trained, a test run before full implementation.

6.5.1 Pruebas de Validación

Measurement tests: Validate liability and revenue calculations using simulations based on historical contracts or test data.
Integration tests: Ensure that accounting and actuarial systems are properly integrated to generate accurate financial statements.

6.5.2 Ajustes y Optimización

Feedback and adjustments: Based on test results, make necessary adjustments to models and systems to correct errors or improve efficiency.

6.6 Transition to Full Implementation

Following the testing phase, the transition to full implementation of IFRS 17 takes place, which includes:

Full reporting under IFRS 17: Produce financial statements in accordance with the new regulations.
Documentation and dissemination: Ensure that all financial statement documentation and disclosures comply with the requirements of the standard.

6.7 Continuous Monitoring and Review

Once IFRS 17 is implemented, periodic reviews should be conducted to ensure the company continues to comply with the standard.

6.7.1 Seguimiento Post-Implementación

Internal and external audit: Ensure that internal and external audits validate that the insurer is complying with IFRS 17.
Continuous improvementAs new practices, regulatory changes, or technology improvements emerge, the insurer must be ready to adjust its processes and systems.

7. How Does IFRS 17 Affect Non-Insurance Companies?

Although the IFRS 17 It is specifically designed for entities that issue insurance contracts, its scope and application may have indirect and highly relevant implications for the non-insurance companies. This is because many non-insurance companies interact with insurers, either as insured, investors either partners in transactions involving insurance products. In addition, insurers also have a direct impact on the accounting, financial decisions, and operations of other industries. The key aspects that make the scope of the insurance industry relevant are explained below. IFRS 17 for non-insurance entities.

Bloques NIIF Responsivos

7.1 Commercial Relations with Insurers

Changes in Insurance Accounting: Insurers must measure liabilities using new criteria, which may modify premiums and contractual conditions.
More Transparent Financial Information: Allows non-insurance entities to compare terms and risks between different insurers.

7.2 Investments and Relationship with Insurers

Impact on Financial Statements: New reports better detail risks and impact investment evaluations for insurance companies.
Insurance Costs and Financial Risk: Possible increases in premiums and volatility in future insurance costs.

7.3 Reinsurance and Risk Management Contracts

Reinsurance: The way insurers measure their reserves and risks impacts those who have agreements with them.
Risk Management: Changes in accounting can alter prices and risk perception in the market.

7.4 Evaluation of Insurance Providers

Supplier Evaluation: Changes in insurer solvency influence insurance selection.
Operational Risks: New accounting policies may affect the coverage and costs of insurance policies purchased.

7.5 Financial Reporting and Regulation

Financial Regulation: There may be new criteria for evaluating insurers.
Reporting Requirements: Non-insurance entities may need to adapt how they present their financial statements if they have ties to insurers.

8. IFRS 17 and IFRS 9: How They Work Together for Complete Financial Management

The IFRS 17 (International Financial Reporting Standard on Insurance Contracts) and the IFRS 9 (International Financial Reporting Standards on Financial Instruments) are two key standards that impact insurers and other entities regarding the accounting and presentation of their financial statements. Although they address different aspects (IFRS 17 focuses on accounting for insurance contracts, and IFRS 9 on financial instruments), both must be implemented consistently and complementarily by insurers due to the interrelationship of financial risks and the assets associated with insurance contracts.

8.1 Impact on the Measurement of Assets and Liabilities

8.1.1 Medición de los Pasivos por Contratos de Seguro (NIIF 17)

The IFRS 17 establishes that liabilities for insurance contracts must be recognized and measured over time, considering future cash flows and adjusting for the risk inherent in those flows. This implies a complex measurement approach that includes the updating of liabilities of insurance contracts based on the evolution of cash flows and the measurement of the associated uncertainty.

Risk adjustments and margins: Insurance contracts under IFRS 17 must reflect a service margin (a risk adjustment that reflects future uncertainties), which dynamically affects the value of liabilities.

8.1.2 Medición de Instrumentos Financieros (NIIF 9)

On the other hand, the IFRS 9 regulates the measurement and classification of financial assets and financial liabilities. The financial assets of insurers, which include investments (such as bonds, shares, investment portfolios), should be measured according to the IFRS 9 categories: fair value through earnings (FVTPL), fair value through other comprehensive income (FVTOCI), either amortized, depending on the intentions of the entity and the nature of the asset.

Classification and measurement of financial assets: Depending on the insurer's intention regarding its investments, gains or losses may be generated related to the measurement of those assets, which will influence the net result for the period.

Interrelation between both standards:

Alignment of measurements: Assets and liabilities arising from insurance contracts, such as underlying financial assets (e.g. investments that back insurance liabilities), need to be measured and reported in accordance with IFRS 9, while insurance liabilities are subject to the principles of IFRS 17Fluctuations in financial assets can impact the valuation of insurance contract liabilities, and vice versa.

For example, insurers could use financial assets to cover the value of liabilities under insurance contracts (e.g., real estate either bond portfolios). The measurement of these assets (according to IFRS 9) will have to be aligned with the measurement of insurance liabilities (according to IFRS 17), so that both measurements are consistent and correctly reflect the insurer's financial position.

8.2 Risk Management and Coverage

8.2.1 Estrategias de Cobertura de Riesgos (NIIF 17 y NIIF 9)

The risk management is central to both insurers and financial product issuers. Often, insurers they use derivatives either other financial instruments to manage the risks associated with its liabilities under insurance contracts (such as derivatives to hedge interest rate or exchange rate risks).

According to the IFRS 9, hedging instruments, such as derivatives, are accounted for under a coverage ratio specific, which implies a special measurement of the related financial assets and liabilities.
The IFRS 17 requires that insurance liabilities be measured based on future cash flows that may include variability due to market factors (such as interest rates and exchange rates). If these future cash flows are covered For financial instruments, it is crucial that hedge accounting is aligned between the two standards.

8.2.2 Aplicación conjunta de la contabilidad de cobertura

The IFRS 9 establishes that insurers can apply hedge accounting when they use financial instruments to mitigate the risks of the insurance contract's cash flows (e.g., interest rate hedging of insurance liabilities). This ensures that the gains and losses on the financial instruments used as hedges are reflected consistently with the cash flows of the insurance contracts under the IFRS 17.

8.3 Recognition of Gains and Losses

8.3.1 Impacto en el Reconocimiento de Resultados

The IFRS 17 enter the progressive recognition of income and expenses as insurance contracts are provided. Insurers must recognize the insurance income based on the services provided and the changes in liabilities, so that the results are not recognized in a single period.

The IFRS 9, however, affects the recognition of the financial instruments like the investment income, which may include unrealized gains or losses depending on whether financial assets are measured at fair value. Since many insurance contracts are backed by portfolios of financial assets (stocks, bonds, derivatives), the interaction between the results of both standards is crucial for proper presentation of the consolidated results.

Consistency in the presentation of results: If fluctuations in the value of financial assets affect the results, they must be correctly reflected in net income or other comprehensive income, depending on the classification of the assets according to the IFRS 9At the same time, the adjustments to insurance liabilities (according to the IFRS 17) must also be adequately reflected in the financial statements, so that the results of both standards are consistent and do not generate distortions in the financial reports.

8.4 Transparency and Comparability

8.4.1 Aumento en la Transparencia

Both standards, IFRS 17 and IFRS 9, require a level of transparency and disclosure in insurers' financial statements, to improve users' understanding of financial reports regarding risks and sources of profit and loss.

IFRS 17 requires insurers to detail future cash flows and risk margins for insurance contracts.
IFRS 9 requires insurers to provide information on the classification and measurement of financial assets and liabilities, including hedging instruments.

The joint application of both standards increases the comparability and allows investors and other stakeholders to gain a clear view of how market fluctuations impact both financial assets and insurance liabilities. This is especially important in the context of an insurer, since underlying assets may affect the value and profitability of the insurance liabilities.

8.5 Cohesion in the Consolidated Financial Report

Insurance companies that operate with multiple products, contracts and investment portfolios must be able to coordinate the reporting of cash flows and insurance liabilities with the measurement of financial assets. If the two standards are not implemented consistently, there could be inconsistencies between the way in which financial assets are recognized income or the bills derived from insurance contracts and financial assets (investments).

Cohesion in measurement: The fluctuations in financial assets They directly impact the calculation of insurance liabilities and the measurement of the insurer's risk, which requires a unified approach to measuring both the assets as of the Passives under both standards.

9. IFRS 17 vs. IFRS 4: Impact and Differences on Insurance Contracts

The IFRS 17 (International Financial Reporting Standard for Insurance Contracts) replaced the IFRS 4 (International Financial Reporting Standard for Insurance Contracts) and is one of the most significant reforms in insurance accounting. The key differences between these two standards and how the IFRS 17 improves and replaces the IFRS 4.

Comparación NIIF 4 vs NIIF 17

Aspect	IFRS 4	IFRS 17
Purpose	It was a transitional rule that allowed insurers to continue using their national accounting practices (with certain modifications) for insurance contracts while a more consistent global solution was developed.	It aims to provide a single, more transparent global model for the recognition, measurement, presentation, and financial reporting of insurance contracts.
Scope	It allowed insurers to use a combination of local accounting practices and IFRS, resulting in a lack of consistency in how insurance contracts were recognized and measured.	It establishes strict rules for the measurement and presentation of insurance liabilities and how insurers recognize revenue.
Measurement Model	Under IFRS 4, insurers were able to maintain the accounting approach they had previously used, resulting in a lack of consistency.	It is based on three components: - Present value of future cash flows - Expected service margin - Adjustments for uncertainty risk
Revenue Recognition	Revenue recognized upon receipt of premiums or in advance, without adequately reflecting the provision of the service.	Revenue recognized progressively according to the provision of services and the risk pattern.
Financial Presentation	The presentation was less detailed, based on local standards, with limited comparability and transparency.	More detailed, transparent, and consistent presentation, including future cash flows and margins.
Long-Term Contracts	It did not require uniform treatment nor did it accurately reflect future profitability.	Establishes a systematic approach to measuring profitability and distributing margins over the life of the contract.
Flexibility and Complexity	It offered more flexibility but less transparency and comparability.	Greater complexity, but provides more comparable and transparent results.

The IFRS 17 replaces the IFRS 4 with the aim of offering a more consistent and transparent global approach to the measurement, recognition and presentation of information on insurance contracts. Unlike the IFRS 4, which allowed greater flexibility but generated a lack of comparability and transparency, the IFRS 17 It introduces a rigorous methodology that ensures that financial statements accurately reflect future cash flows, profit margins, and the risks associated with insurance contracts. Its implementation represents an important step toward greater consistency in insurance accounting globally.

This new standard marks a fundamental change in the accounting for insurance contracts, adopting a stricter and more homogeneous approach than its predecessors. While the adoption of the IFRS 17 While it poses significant technical and operational challenges for insurers, it also offers key benefits, such as increased transparency, comparability, and improved risk control. Its correct implementation is essential to ensure that financial statements accurately reflect the economic and financial position of insurers.

With its entry into force, the IFRS 17 It establishes a global accounting framework that will transform the way insurers manage and report their insurance contracts. Aligned with international accounting principles, this standard will promote greater confidence among investors and regulators, strengthening the transparency and reliability of financial reporting.