Insurance Finance Expense IFRS 17

Insurance Finance Expense IFRS 17: Understanding the New Accounting Standard for Insurers

The International Financial Reporting Standard (IFRS) 17 is a new accounting standard for insurance contracts that aims to provide better transparency and consistency in financial reporting across the insurance industry. One of the key components of IFRS 17 is the Insurance Finance Expense (IFE), which is a new concept introduced to replace the existing insurance finance costs. In this article, we will delve into the details of IFRS 17 and explore the impact of IFE on insurers.

Introduction to IFRS 17

The International Accounting Standards Board (IASB) developed IFRS 17 to address the challenges in accounting for insurance contracts. The standard sets out the principles for recognizing, measuring, presenting, and disclosing insurance contracts in financial statements. IFRS 17 aims to provide a consistent approach to accounting for insurance contracts, regardless of the type of contract or the company’s location.

IFRS 17 applies to all insurance contracts, including reinsurance contracts, that an insurer issues and renews on or after January 1, 2023. The standard requires insurers to recognize the obligation to provide insurance coverage as a liability and the right to receive premiums as an asset.

One of the challenges that insurers face when accounting for insurance contracts is the variability in cash flows. The liability for insurance contracts can change based on factors such as changes in interest rates, mortality rates, and claims experience. IFRS 17 aims to address this challenge by introducing a new measurement model called the Building Block Approach (BBA).

The Building Block Approach

Under the BBA, insurers must separate the insurance contract into three components:

1. The Liability for remaining coverage (LRC)
2. The Fulfillment Cash Flows (FCF)
3. The Contractual Service Margin (CSM)

The LRC represents the present value of future claims that are expected to arise under the insurance contract. The FCF represents the cash flows that the insurer expects to receive from the insurance contract, including premiums and claims payments. The CSM represents the unearned profit that the insurer will recognize over the life of the contract.

The IFE Calculation

The IFE is a new concept introduced by IFRS 17 to replace the existing insurance finance costs. The IFE represents the finance cost associated with the CSM. It is calculated as the interest expense on the discounted CSM plus the expected return on any assets that are held to support the CSM.

The IFE calculation is a crucial part of the BBA as it reflects the time value of money and the expected return on assets. The IFE is also an important indicator of the profitability of the insurance contract. If the IFE is high, it may indicate that the insurer is not earning a sufficient return on the insurance contract.

Impact on Insurers

IFRS 17 represents a significant change in the way insurers account for insurance contracts. Insurers will need to implement new systems and processes to comply with the requirements of the standard. The implementation of IFRS 17 will also require insurers to work closely with their actuaries to develop new assumptions and models to support the measurement of insurance contracts.

One of the key impacts of IFRS 17 is the increased transparency and consistency in financial reporting across the insurance industry. The standard will make it easier for investors and analysts to compare the financial performance of insurers. The increased transparency may also lead to improved pricing and risk management practices in the insurance industry.

Conclusion

IFRS 17 is a new accounting standard for insurance contracts that aims to provide better transparency and consistency in financial reporting across the insurance industry. The standard introduces the concept of the IFE, which represents the finance cost associated with the CSM. The IFE calculation is a crucial part of the BBA and is an important indicator of the profitability of the insurance contract. The implementation of IFRS 17 will require insurers to work closely with their actuaries to develop new assumptions and models to support the measurement of insurance contracts. The increased transparency and consistency in financial reporting may lead to improved pricing and risk management practices in the insurance industry.