IFRS 17 transformed how insurance companies account for their contracts, and a key part of this change is using measurement models to understand the financial impact of those contracts. These models ensure consistent and transparent reporting across the industry. Here's a breakdown of the three main ones:
The General Measurement Model (GMM): This is the default approach for most contracts and is considered the most comprehensive. It uses a fair value approach, estimating the present value of all expected cash flows, including premiums received and future claims paid. The GMM also incorporates the Contractual Service Margin (CSM), representing the expected profit the insurer will earn over the life of the contract, considering factors like time value of money and inherent risks. This model is well-suited for complex, long-term contracts like life insurance or long-term health plans.
The Premium Allocation Approach (PAA): This is a simplified model for shorter-term insurance contracts (coverage period less than a year). Unlike the GMM, it doesn't require a full fair value calculation. Instead, it allocates a portion of the premium income to each coverage period based on the time value of money. This makes the PAA more efficient for shorter contracts where complex fair value calculations might be less important. However, the PAA may not be suitable for contracts with significant investment components or where the risk profile changes over time.
The Variable Fee Approach (VFA): This model applies specifically to investment-linked insurance contracts where benefits are directly tied to the performance of underlying investments. Under VFA, the insurer recognizes its fee as income when earned, which is typically a portion of the investment returns generated. Unlike the GMM, the VFA doesn't explicitly consider the CSM, but the insurer's expected profit is reflected in the fees charged. VFA is best suited for contracts where the policyholder shares investment risks and rewards, and the insurer's role is primarily to manage the underlying assets.
Choosing the right measurement model depends on the specific characteristics of the insurance contract. Insurers need to consider factors like contract duration, risk profile, and the presence of investment components to determine the most suitable approach under IFRS 17.
By understanding these measurement models, stakeholders can gain a clearer picture of the insurer's financial health and future profitability. The transparency provided by IFRS 17 allows for better comparisons between insurance companies and ultimately benefits policyholders by fostering a more informed insurance marketplace. While Merit Global Training offers specific courses on IFRS 17, they do provide a variety of resources on insurance and risk management. Understanding these concepts can be helpful for insurers navigating the changing landscape brought about by IFRS 17.
