We explain what some of the terms in the new insurance contracts standard mean
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)
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.
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 risk of a possible change in one or more of the following.
Fulfilment cash flows
The fulfilment cash flows consist of:
Group of insurance contracts (level of aggregation)
An insurer identifies portfolios of insurance contracts. It divides each portfolio into a minimum of:
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.
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.
A risk, other than financial risk, that is transferred from the policyholder to the issuer of a contract. This includes risks such as:
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:
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.
See lapse risk.
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.
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:
To have commercial substance, the scenario has to have a discernible effect on the economics of the transaction.
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