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IFRS 17 – Practical Tips and Lessons Learnt

As the IFRS 17 implementation date draws nearer, what are the lessons learnt from implementation preparation over the last couple of years, and how can insurers worldwide prepare to ease the burden of compliance?

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By Holly Deakin , 

Senior Vice President, Marsh Risk Analytics

25/10/2022 · 3-minute read

Part 1: Measurement Model Selection 

IFRS 17 is the new financial reporting standard for insurance contracts, as issued by the International Accounting Standards Board (IASB).  IFRS 17 sets out the principles and rules to adhere to when valuing and reporting on insurance contracts, and will supersede IFRS 4, with an implementation date of 1 January 2023. 

IFRS 17 sets out the following two measurement models for valuing insurance contracts that may be relevant to clients: General Measurement Model (GMM) and Premium Allocation Approach (PAA). Both models require a valuation of the Liability for Remaining Coverage (LRC or unearned exposure) and Liability for Incurred Claims (LIC or earned exposure). 

As the IFRS 17 implementation date draws nearer, what are the lessons learnt from implementation preparation over the last couple of years and how can insurers worldwide prepare to ease the burden of compliance? 

Marsh has compiled some top practical tips and important lessons learnt when considering some of the key principles of the standard. This is the first in a three-part series of IFRS 17 blogs and covers the considerations regarding measurement model selection. 

Contract Boundaries

Top Practical Tips:

Carefully read all clauses of the policy wording and the Terms & Conditions (T&C) and create an inventory of the standard T&C. Whenever T&Cs change, seek interpretation from your legal advisers about IFRS 17 to review the impact. If needed, ensure there is enough time for your legal team to review the specific wordings. 

Things to Watch Out For:
  • Unilateral termination clauses or re-underwriting clauses in the contract wording.
  • Maintenance periods or extended reporting periods.

Level of Aggregation

Top Practical Tips:

Check whether the data available is at the level of granularity necessary to fulfil the aggregation requirement. Ensure to strike a balance between the precision of calculation and the cost of running the process on a business-as-usual basis, considering model run times, the number of accounting reconciliations, and any required controls. 

Things to Watch Out For:

Risk adjustment may be included when determining the expected profitability of a contract or group of contracts and could tip a contract into a loss-making cohort. In addition, pricing loss ratios need to be on a best estimate basis when used to determine expected profitability at inception.

Eligibility Testing

Lessons Learnt:

Be sure to engage with your auditor early to define materiality; and make sure the contract modelling assumptions you make are sufficiently justified. Also, make sure to decide your risk adjustment before starting eligibility testing. 

Things to Watch Out For:
  • Seasonality of claims which will impact the revenue recognition pattern. 
  • Contractual Service Margin amortisation pattern which can be very subjective. 

How Marsh Can Help

If you work for an insurance company or captive that reports under IFRS and are concerned about implementation, get in touch with the Marsh Analytics Pacific team to discuss how to prepare for a smooth transition.

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