Page 40 - The Insurance Times August 2022

many significant / important recognition and
measurement processes have to be carried out at the
level of group. Group level details are expected in notes
along with details of reconciliations. Grouping
requirements of IFRS 17 appear to be new
requirements. For the purpose of deciding the group,
the standard prescribes different basis. First being the
profitability of the contract / s, based on which three
groups are defined - group of onerous contracts
(contracts whose economic result is negative), group of
contract with no significant possibility of becoming
onerous subsequently and group of other contracts.
Second basis for grouping is the concept of annual co-
hort which prohibits contracts issued one year apart
being included in the same group. Currently this 1. General Measurement Model / Building Block
grouping process does not seem to be the practice. Approach (GMM/BBA)
Hence Insurers, both life as well as non-life, have to
2. Premium Allocation Approach (PAA)
evolve practices to segregate the details of different
3. Variable Fee Approach (VFA)
groups so that they remain compliant with the
requirements of the standard. The purpose behind this
1. General Measurement Model : Also called, building
grouping concept appears to be the prevention of
block approach is the primary / basic model for
offsetting of profitability of one group against the other.
measurement of insurance contracts. The model
c. Onerous Contracts : A contract in which the measures a group of insurance contract by sum of the
unavoidable costs of meeting the obligations under the following four building blocks.
contract exceed the economic benefits expected to be
First block is that of Fulfilment Cash flows (inflows as well
received under it. An insurance contract is onerous at
as outflows). Cash flows relate to premium, claims,
initial recognition if the total of the Fulfillment Cash
acquisition costs, expenses overheads etc, Expected
Flows, any previously recognised acquisition cash flows
value of these expected cash flows (called fulfilment
and any cash flows arising from the contract at that
cashflows) over the entire contract period have to be
date is a net outflow. Purpose behind identification of
estimated. And such estimation has to be probability-
onerous contracts is the need for immediate recognition
weighted, unbiased and explicit. Since these future
of loss. As stated earlier the current concept of
cash flows are expected over a long future period, as
Premium Deficiency in Non-life Insurance some what
the entity fulfils insurance contracts, they have to be
approximates to this concept of onerous contracts. Long
discounted to arrive at their present value. (Hence is
term motor third party liability insurance and the long
called current balance sheet mesurement).
term health insurance policies may have to be examined
The fulfilment cash flows estimated initially may not
for the onerousness.
remain relevant with the passage of time due to various
B. New Measurement Models dynamic forces in operation. Therefore at every
reporting period they have to be adjusted to
It is important for the insurers to recognise, not only all the
incorporate the effect of changes caused by the
obligations under the insurance contracts, but also the
changing circumstances. These circumstances relevant
extent of those obligations with as much accuracy as
to insurance contracts are classified as non-financial risks
possible. The obligations, particularly when they have
(insurance risks) and financial risks. These adjustments
components which differ in their economic behaviour, make
constitute respectively the second and the third block
this task rather difficult. Measuring insurance contracts /
of the measurement model.
transactions has always been different from other
contracts and transactions. Now IFRS 17 has refined the The fourth and the last block is that of Contractual
process of measurement and given shape to appropriate Service Margin. As stated in one of the preceding para,
measurement models. There are three models under the the entire amount of profit on the contract has to be
new standard. systematically spread over the complete service period,
40 The Insurance Times, August 2022