IFRS 17 Insurance Contracts Memo Template (CSM, PAA, VFA, LDTI)

IFRS 17 Insurance Contracts Memo: [Product, portfolio or cohort]

Technical accounting memo for one insurance portfolio or one annual cohort: scope and contract boundary, level of aggregation, measurement model choice (general model, premium allocation approach or variable fee approach), fulfilment cash flows, risk adjustment, contractual service margin (CSM), onerous contracts, reinsurance held, presentation, transition and disclosure, with a US GAAP comparison to the long-duration targeted improvements (LDTI) in FASB ASC Topic 944. Structure aligned with IFRS 17 Insurance Contracts (issued May 2017, amended June 2020 and December 2021, effective for annual periods beginning on or after 2023-01-01), cited by paragraph number only. Replace every [bracketed] value and every row marked Example. This is a document format, not accounting, actuarial, audit, tax, legal or financial advice; check the current official text and a qualified professional.

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Revision history

Contents

1. Summary and conclusion
2. Contract facts and documents reviewed
3. Scope, separation of components and contract boundary
4. Level of aggregation
5. Measurement model choice
6. Fulfilment cash flows and discount rates
7. Risk adjustment for non-financial risk
8. Contractual service margin and coverage units
9. Onerous contracts and reinsurance held
10. Presentation and insurance service result
11. Transition
12. Disclosure
13. US GAAP comparison: ASC 944 and LDTI
14. Controls, data and systems
15. Glossary and references
16. Standard and licence note

1. Summary and conclusion

State the conclusion first, then the judgements behind it. Quantify the effect on the first reporting period and say which judgements are close calls, with a pointer to the section that sets out the alternative view. Auditors and supervisors read this section first and return to it after reading the rest.

Example: The 2027 cohort of Term Protect contracts issued by Fenwold Life Assurance plc falls into two groups: GRP-TP-2027-A, with no significant possibility of becoming onerous, and a small onerous group GRP-TP-2027-B (loss GBP 150k, GBP 90k net of reinsurance, section 9). Group A is measured under the general model because the coverage period is up to 25 years and the premium allocation approach eligibility test fails. At initial recognition the present value of future cash inflows is GBP 12,000k, outflows are GBP 9,800k and the risk adjustment is GBP 600k, so the CSM is GBP 1,600k. In FY2027 the CSM accretes GBP 56k of interest at the locked-in rate, absorbs an adverse lapse-assumption change of GBP 120k and releases GBP 365.7k to profit or loss on a sum-assured coverage unit basis, closing at GBP 1,170.3k. The insurance service result of group A for the year is GBP 450.7k. The main judgement is the coverage unit basis (section 8).

2. Contract facts and documents reviewed

Read the policy wording, the product specification, the pricing basis, the reinsurance treaty and any distribution agreement that pays commission or shares profit. Ask the product owner whether any practice exists outside the wording, such as discretionary payments or premium holidays, and record the answer with the name of the person who confirmed it.

3. Scope, separation of components and contract boundary

Confirm that each contract transfers significant insurance risk (paragraph 3 and paragraphs B7 to B25) and note any scope exclusions considered (paragraphs 7 and 8A). Then assess whether embedded derivatives, distinct investment components or distinct goods and services must be separated (paragraphs 10 to 13). Record the conclusion and the evidence for each candidate component.

Set the contract boundary using paragraph 34 and paragraphs B61 to B71. Ask: when does the insurer gain the practical ability to reassess the risk of the particular policyholder, or of the portfolio, and set a price that fully reflects it? Cash flows after that point are outside the boundary.

4. Level of aggregation

Identify the portfolio (contracts with similar risks managed together, paragraph 14). Within it, divide contracts at initial recognition into the three profitability groups in paragraph 16 and never combine contracts issued more than one year apart (paragraph 22). Explain the evidence used to assess onerousness at initial recognition (paragraph 17 allows a set of contracts to be assessed together when reasonable and supportable information shows they fall in the same group).

If a jurisdiction-specific exemption from annual cohorts applies, such as the optional exemption in the EU-adopted version of IFRS 17 for certain intergenerationally mutualised contracts, state that the exemption is a carve-out and that the group does not then comply with IFRS 17 as issued by the IASB.

5. Measurement model choice

Three models are available. The general model (GMM, paragraphs 32 to 52) is the default. The premium allocation approach (PAA, paragraphs 53 to 59) is an optional simplification for the liability for remaining coverage, available when the coverage period of each contract is one year or less, or when the entity reasonably expects the result not to differ materially from the general model (paragraphs 53 and 54). The variable fee approach (VFA, paragraph 45 and paragraphs B101 to B118) is required for contracts with direct participation features and is assessed at inception only.

6. Fulfilment cash flows and discount rates

Fulfilment cash flows combine an unbiased, probability-weighted estimate of future cash flows (paragraph 33), discounting for the time value of money and financial risk (paragraph 36) and the risk adjustment (paragraph 37, section 7). List each cash flow inside the boundary (paragraph B65) and confirm that excluded items are left out (paragraph B66). Allocate insurance acquisition cash flows to groups on a systematic and rational basis (paragraph 28A onwards).

State the discount rate approach: bottom-up (risk-free curve plus an illiquidity premium) or top-down (reference portfolio yield less credit risk), with reference to paragraphs 36 and B72 to B85. Record the locked-in rate used for CSM accretion for each cohort.

7. Risk adjustment for non-financial risk

The risk adjustment reflects the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows from non-financial risk (paragraph 37, paragraphs B86 to B92). State the technique (confidence level, cost of capital or another approach), the risks covered (mortality, lapse, expense), the diversification level assumed and the confidence level the result corresponds to, which paragraph 119 requires to be disclosed.

If you disaggregate the change in the risk adjustment between the insurance service result and insurance finance income or expenses (paragraph 81), state the policy choice.

8. Contractual service margin and coverage units

At initial recognition the CSM equals the net inflow of the fulfilment cash flows, so that no gain arises (paragraph 38). Subsequently, for contracts without direct participation features, adjust the CSM in the order in paragraph 44: new contracts, interest accreted at the locked-in rate, changes in fulfilment cash flows relating to future service (paragraphs B96 to B100), currency effects and then the release for services provided in the period, measured with coverage units (paragraph B119).

Choose coverage units that reflect the quantity of benefits and the expected duration of coverage. Justify the basis, show the units per period and say whether units are discounted.

8.1 CSM at initial recognition

8.2 Coverage units

Example: The basis is sum assured in force at the start of each year, undiscounted, scaled so that year 1 equals 100.

The Example shows a five-year horizon for readability; a real 25-year cohort shows every year to the end of the boundary.

8.3 CSM roll-forward FY2027

9. Onerous contracts and reinsurance held

A group is onerous when the fulfilment cash flows are a net outflow at initial recognition (paragraph 47). Recognise the loss in profit or loss, establish a loss component of the liability for remaining coverage and allocate later changes systematically (paragraphs 48 to 52).

Reinsurance contracts held are measured as separate groups with the modifications in paragraphs 60 to 70A: the CSM can be a net cost or a net gain, and a loss-recovery component offsets losses on onerous underlying groups to the extent the treaty covers them.

10. Presentation and insurance service result

Insurance revenue under the general model reflects the services provided in the period: expected claims and expenses released, the change in the risk adjustment, the CSM release and the recovery of acquisition cash flows (paragraphs 83 and B120 to B125). Insurance service expenses comprise incurred claims and expenses, amortisation of acquisition cash flows and losses on onerous groups (paragraph 84). Insurance finance income or expenses are presented separately (paragraphs 87 to 92), with the policy choice on disaggregation through other comprehensive income stated (paragraphs 88 and 89).

The Example below covers GRP-TP-2027-A only.

Cross-check: CSM release 365.7 plus risk adjustment release 140.0, less the claims experience variance 60.0, plus the expense experience variance 5.0, equals 450.7.

From reporting periods beginning on or after 2027-01-01, IFRS 18 Presentation and Disclosure in Financial Statements changes the structure of the statement of profit or loss; see the IFRS 18 Transition Plan (finance/ifrs-18-transition-plan) for how insurance lines map to the operating and investing categories.

11. Transition

Apply IFRS 17 retrospectively unless impracticable (paragraph C3). If impracticable for a group, choose the modified retrospective approach (paragraphs C6 to C19A) or the fair value approach (paragraphs C20 to C24). Record the approach for each group, the evidence for impracticability and the transition-date CSM. Paragraphs 114 to 116 require the transition disclosures to continue until the affected groups run off. The December 2021 amendment permits a classification overlay for comparative financial assets (paragraphs C28A to C28E).

For entities adopting later (first-time adopters, or acquisitions of in-force books), restate the approach for the relevant date.

12. Disclosure

Disclosures follow the objective in paragraph 93 and include reconciliations of the liability for remaining coverage and incurred claims (paragraphs 100 to 105), analysis by measurement component (paragraph 101), new business effects (paragraph 107), expected CSM recognition (paragraph 109), significant judgements (paragraph 117), the risk adjustment confidence level (paragraph 119), and the nature and extent of risks (paragraphs 121 to 132).

Use the Financial Statement Disclosure Checklist (finance/financial-statement-disclosure-checklist) to track completeness across the annual report.

13. US GAAP comparison: ASC 944 and LDTI

FASB ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, as deferred by ASU 2019-09 and ASU 2020-11, is effective for SEC filers other than eligible smaller reporting companies for fiscal years beginning after 2022-12-15, and for all other entities for fiscal years beginning after 2024-12-15 (interim periods within fiscal years beginning after 2025-12-15). Record the differences for this product so the group can reconcile the two sets of numbers.

14. Controls, data and systems

Name the models, the assumption governance forum and the key controls. Link each control to the risk it mitigates. Use the Model Development Document (finance/model-development-document) for the actuarial model and the Month-End Close Checklist (finance/month-end-close-checklist) for the ledger postings.

15. Glossary and references

15.1 Glossary

15.2 References

Standard and licence note

Structure aligned with IFRS 17 Insurance Contracts (IFRS Foundation) and FASB ASC Topic 944 as amended by ASU 2018-12. Standards are cited by name and paragraph number only; no text, definitions or examples from the IFRS Foundation or FASB are reproduced, and IFRS is a trademark of the IFRS Foundation used nominatively. Paragraph numbers were checked against a compiled national adoption of IFRS 17 with identical numbering. Obtain the current standards for the normative requirements and check later amendments and effective dates. Fenwold Life Assurance plc, its products, treaties and every figure are fictional and original. This template is original text written for this collection and is not accounting, actuarial or legal advice; check the current official text and a qualified professional. Template licence: MIT.