IFRS 17 implementation Services

IFRS 17 Insurance Contracts was issued by the IASB in May 2017, amended in June 2020 and became mandatory for annual reporting periods beginning on or after 1 January 2023. It applies to entities that issue insurance contracts, reinsurance contracts or investment contracts with discretionary participation features — replacing IFRS 4 Insurance Contracts. In the UK, listed insurers and reinsurers are required to comply with UK-adopted IFRS 17. Unlisted insurers preparing their consolidated financial statements under IFRS are also in scope. Some markets provided extended implementation timelines to 2025 or 2027 for locally regulated insurers — Shasat supports entities at all stages of the implementation journey.

The Contractual Service Margin (CSM) is the unearned profit in a group of insurance contracts at initial recognition. Under IFRS 17, profit from insurance contracts cannot be recognised at inception — it must be deferred in the CSM and released to profit or loss as insurance services are provided over the coverage period, at a rate determined by reference to coverage units. The CSM is one of the three building blocks of the GMM liability measurement (alongside the present value of future cash flows and the risk adjustment). The size and pattern of CSM release directly determines the insurer’s reported profit from insurance services in each period. If a group of contracts is expected to be loss-making (onerous) at initial recognition, no CSM is recognised — instead, a Loss Component is recognised immediately in profit or loss. The CSM therefore fundamentally changes when and how insurers report profit compared to IFRS 4.

IFRS 17 provides three measurement models. The General Measurement Model (GMM) — also called the Building Block Approach — is the default model. It measures the insurance liability as the sum of the present value of future cash flows, the risk adjustment for non-financial risk and the CSM. It applies to all groups of insurance contracts for which the PAA or VFA criteria are not met. The Premium Allocation Approach (PAA) is a simplified optional model available for groups where the coverage period is 12 months or less, or where PAA would not produce a materially different LRC from the GMM. It measures the LRC based on the unearned premium, making it operationally simpler for short-duration contracts. The Variable Fee Approach (VFA) is a mandatory modification of the GMM that applies to direct participating contracts — where policyholders have a substantive right to share in the returns on a pool of underlying items. Under the VFA, the CSM absorbs changes in the fair value of underlying items, significantly reducing P&L volatility from investment return movements compared to the GMM.

IFRS 17 and IFRS 9 interact significantly because insurers hold large investment portfolios to back insurance liabilities. The classification and measurement of these assets under IFRS 9 affects reported performance under IFRS 17. The key interaction points are: (1) OCI option — IFRS 17 allows entities to disaggregate insurance finance income and expense between P&L and OCI, reducing the mismatch between FVOCI assets and insurance liabilities discounted at current rates. (2) Asset classification for VFA contracts — because VFA liabilities are measured at current rates, financial assets backing VFA contracts are often classified as FVTPL under IFRS 9 to avoid P&L volatility from accounting mismatches. (3) Reinsurance receivables — ECL under IFRS 9 applies to reinsurance recoverables. (4) Investment components — non-insurance components of hybrid contracts may need to be separated and accounted for under IFRS 9. Shasat provides integrated IFRS 9 and IFRS 17 advisory, addressing both standards simultaneously to avoid creating new mismatches.

IFRS 17 paragraphs 36 and B72–B85 require insurance contract liabilities to be discounted at rates that reflect the characteristics of the insurance contracts’ cash flows — specifically their timing, currency and liquidity. The standard does not prescribe specific rates but requires consistency with observable current market prices for instruments with matching cash flow characteristics. Two approaches are commonly used: the bottom-up approach (starting from a risk-free rate and adding an illiquidity premium) and the top-down approach (starting from an asset portfolio yield and deducting credit risk and other differences). IFRS 17 uses two distinct rate concepts: the locked-in rate (the rate at initial recognition — used to accrete the CSM) and the current rate (the rate at each reporting date — used to measure fulfilment cash flows). Where current rates are used for LRC measurement but locked-in rates for CSM accretion, the difference creates insurance finance income or expense — which may be recognised in P&L or OCI under the disaggregation option.

Yes — significantly. IFRS 17 compliance is not a one-time event. Even insurers that adopted IFRS 17 from 1 January 2023 continue to face ongoing challenges: refining actuarial models to reflect emerging best practices, responding to IASB agenda decisions and IFRIC interpretations as they are published, improving disclosure quality against evolving peer benchmarks, resolving auditor challenges on complex measurement areas (discount rates, risk adjustment, coverage units, onerous contract identification), and optimising the interaction between IFRS 17 and IFRS 9. Shasat provides retained on-call advisory, periodic model review, disclosure benchmarking against published peer financial statements, technical accounting memoranda on emerging issues and staff training — ensuring that IFRS 17 accounting continues to develop alongside the standard itself.