Benjamin Franklin once said, “failing to plan, is planning to fail…" IFRS 17 Insurance Contracts is imminent as it is effective for yearends commencing on or after 1 January 2023. What once seemed many reporting periods away is now becoming more of a reality for insurers – the countdown has begun. The dilemma for many insurers currently is how they are going to get there? Are they going to be ready? Transition - all great changes are preceded by chaos IFRS 17 needs to be applied retrospectively unless this is impracticable, or the risk mitigation option1 has been chosen for insurance contracts with direct participation features.
The transition approach is determined for each group of contracts. To the extent that full retrospective application is impracticable, an insurer applies either the modified retrospective approach or the fair value approach. The big unknown at transition date is the Contractual Service Margin (CSM) which represents the unearned profit for future services to be provided by that specific group of contracts. In essence, the starting point will be to determine the group of insurance contracts based on historical issue dates. The next steps are as follows: – determine fulfilment cash flows and CSM at the date of initial recognition of the contracts in the group before transition. – revise fulfilment cash flows using current assumptions as at each reporting date prior to transition to identify CSM and other adjustments for each period prior to transition. – roll forward the CSM to the transition date to reflect interest accretion, changes in assumptions and foreign exchange rates, changes in the variable fee for VFA contracts and release the CSM to profit or loss.