Page 39 - The Insurance Times August 2022

of the group of insurance contracts that the entity will approach, the two approaches vary in subsequent
recognise as it provides services in the future. (A component adjustments. The items getting adjusted under general
of the carrying amount of the asset or liability). This is measurement model vary from the items adjusted under
measured on initial recognition of a group of insurance Variable Fee Approach.
contracts at an amount that, unless the group of contracts
is onerous, results in no income or expenses arising from. There is no CSM under Premium Allocation Approach ( which
CSM in the beginning is equal to estimated non-negative is permitted for contracts with a period of one year or less
margin between expected outgos and income. After the mostly found in non-life segment). As far as onerousness of
CSM is initially established, it has to be subsequently the contracts (having period of one year or less and
appropriated as the services get rendered. qualifying for Premium Allocation Approach), the current
accounting practice of premium deficiency followed by non-
First, it is updated for changes in the fulfilment cashflows life insurance segment approximates to the principle laid
and changes in risk adjustments (both negative as well as out by the general measurement model. If the general
positive). Then it is appropriated between the services mesurement model (based on fulfilment cashflows) has to
rendered / yet to be rendered. The portion appropriated be followed for the loss on such onerousness of contracts,
for services rendered is taken to P&L. And the portion then groupping based on onerousness also becomes
pertaining to services remaining to be rendered will continue relevant.
as CSM. If such negative changes are in excess of the CSM,
such excess is directly taken to the P&L.Account. Thus the As against the above CSM principles prescribed by the
standard classifies the CSM into earned (for past services) standard for insurance and reinsurance contracts issued, the
and unearned (relating to future services). An associated standard permits a different treatment relating to profit or
issue is the loss on the onerous contracts (contracts where loss on re-insurance contracts held.
the economic result is negative). As stated above it has to
be recognised immediately. In addition the amount of loss 3. Portfolios and Groups as units of recognition,
on onerous contracts needs to be tracked. The reason being,
measurements and presentation.
any positive changes in fulfilment cashflows and risk
a. Portfolio level Presentation : Under the provisions of
adjustment to the extent of loss earlier recognised in P&L
IFRS 17, the hierarchy of insurance transactions begins
can be reversed to P&L. Excess if any after complete
with individual contracts at the base and porfolio at the
reversal of earlier losses will have to be added to CSM and
top, with another level in between called "group". The
spread over the remaining period of services.
standard requires preparation and presentation of
financial statements at the level of portfolio. Portfolio -
CSM is provisional, in the sense, it keeps on changing in
is a term used to identify a group of insurance contracts
response to changes in different components of fulfilment
subject to similar risks and managed together. Contracts
cashflows and risks associated with such cashflows and it gets
within a product line would be expected to have similar
adjusted subsequently. Though initial recognition of CSM is
risks and hence would be expected to be in the same
same in general measurement model and variable fee
portfolio if they are managed together. Thus an insurer
will have several portfolios. The current practices in
insurance sector relating to preparation and
presentation of financial statements appear mostly in
line with this presentation expectation of IFRS 17.
However, the life sector may have to examine the need
for separate portfolios for insurance contracts with
direct praticipation and investments contracts with
discretionary participation features. Similarly there is a
need to examine whether long-term policies in non-life
sector need to be presented as a separate portfolio.

b. Group level details in notes : Group (based on the
grouping criteria mentioned herein below) is a subset
of portfolio. The level of group is no less important, as

The Insurance Times, August 2022 39