The new insurance contracts standard – IFRS 17 – brings fundamental changes to international insurance accounting, giving users of financial statements a whole new perspective.

However, it contains several terms that readers may find unfamiliar. Here, we explain what some of the most frequently used terms and abbreviations mean. For a better understanding of the new standard, visit our Introducing IFRS 17 web page.

For a full explanation of these terms and abbreviations, download our First Impressions: IFRS 17 Insurance Contracts (PDF 1.6 MB).

 

Contractual service margin (CSM)

The CSM represents the unearned profit the insurer will recognise as it provides services in the future under insurance contracts in the group.

 

Contract boundary

Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the entity can compel the policyholder to pay the premiums or has a substantive obligation to provide the policyholder with services.

 

Coverage period

The period during which the insurer provides coverage for insured events. This period includes the coverage that relates to all premiums within the boundary of the insurance contract. 

 

Direct participating contracts 

An insurance contract is considered to be a direct participating contract when:

• the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;
• the entity expects to pay the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and
• the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in the fair value of the underlying items.
   

Financial risk

The risk of a possible change in one or more of the following.

• Interest rates
• Financial instrument prices
• Commodity prices
• Currency exchange rates
• Indices of prices or rates
• Credit ratings or credit indices
• Any other variable, except for a non-financial variable that is specific to a party to the contract

 

Fulfilment cash flows

The fulfilment cash flows consist of:

• explicit and unbiased estimates of future cash flows that will arise as the insurer fulfils the contracts;
• an adjustment to reflect the time value of money – i.e. discounting – and the financial risks related to the future cash flows (to the extent that they are not already included in the estimates of future cash flows); and
• an explicit risk adjustment for non-financial risk.
  

 

Group of insurance contracts (level of aggregation)

An insurer identifies portfolios of insurance contracts. It divides each portfolio into a minimum of:

• a group of contracts that are onerous on initial recognition, if there are any;
• a group of contracts that, on initial recognition, have no significant possibility of becoming onerous subsequently, if there are any; and
• a group of any remaining contracts in the portfolio.

An insurer divides each portfolio into annual cohorts, or cohorts consisting of periods of less than one year. 

 

Insurance acqusition cash flows

Insurance acquisition cash flows arise from selling, underwriting and starting a group of insurance contracts. These cash flows need to be directly attributable to a portfolio of insurance contracts to which the group belongs. Cash flows that are not directly attributable to the groups or to individual insurance contracts within the portfolio are included.

 

Insurance contract

A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder). 

If a specified uncertain future event (the insured event) adversely affects the policyholder, then the policyholder has a right to obtain compensation from the issuer under the contract.

 

Insurance risk

A risk, other than financial risk, that is transferred from the policyholder to the issuer of a contract. This includes risks such as:

• death or survival;
• injury;
• illness;
• disability;
• loss of property due to damage or theft;
• failure of a debtor to make a payment when it is due; or
• a possible change in a non-financial variable that is specific to a party to the contract.

 

Investment contract with discretionary participation features (DPFs)

An investment contract with DPFs is a financial instrument that provides an investor with a contractual right to receive, as a supplement to an amount not subject to the discretion of the issuer, additional amounts that are: 

• expected to be a significant portion of the total contractual benefits;
• contractually paid at the discretion of the issuer (regarding timing or amount); and
• contractually based on: 
  • returns from a specified pool of contracts or a type of contract;
  • realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or
  • the profit or loss of the entity or fund that issues the contract.

 

Lapse risk

The risk that the policyholder will cancel the contract at a time other than the issuer expected when pricing the contract (also called persistency risk). 

 

Liability for incurred claims

An insurer’s obligation to investigate and pay claims for insured events that have already occurred. This includes events that have occurred but have not been reported, and other incurred insurance expenses.

 

Liability for remaining coverage

An insurer’s obligation for insured events related to the unexpired portion of the coverage period. 

 

Persistency risk

See lapse risk.

 

Policyholder

A party that has the right to compensation under an insurance contract if an insured event occurs.

 

Portfolio of insurance contracts

Insurance contracts that are subject to similar risks and managed together.

 

Reinsurance contract

An insurance contract issued by an entity (the reinsurer) to compensate another entity (the cedant) for claims arising from insurance contract(s) issued by the cedant. Modifications to the general measurement model are applied to reinsurance contracts held.

 

Risk adjustment for non-financial risk

The risk adjustment for non-financial risk reflects the compensation that the insurer requires for bearing the uncertainty about the amount and timing of cash flows that arise from non-financial risks.

 

Significant insurance risk

Insurance risk is significant if there is a scenario that has commercial substance in which, on a present value basis, there is a possibility that an issuer could:

• suffer a loss caused by the insured event; and 
• pay significant additional amounts beyond what would be paid if the insured event had not occurred.

To have commercial substance, the scenario has to have a discernible effect on the economics of the transaction.