IFRS 17 and the level of aggregation: A key challenge for insurers


13 years after releasing IFRS 4 Standard, “insurance contracts” the International Accounting Standard Board (IASB) has just launched the new Standard IFRS 17 which should be effective from the 1st January 2021. This effective date will be combined with a transition date that will start 1 year before. It will allow insurers to test their new processes. The objective of this new Standard is the measurement[1] of insurance contracts issued by insurers and other authorized companies.

Even if the objective of IFRS 4 was to specify some aspects of the financial reporting for insurance contracts, it did not specify which regulation companies, that issue insurance contracts, have to comply with. This resulted in different accounting practices for similar insurance contracts. Some insurers accounted their insurance contracts under local GAAP, some under IFRS, causing a lack of comparability of information between insurers.

For that reason, the development of a new Standard was requested by market players in order to have more quality of the financial information.  IFRS 17, compared to IFRS 4, will make insurer’s financial reports more relevant, more transparent and also will enable insurance accounting practices to be consistent across jurisdictions.

It is crucial now to find solutions that answer those questions in order to be compliant with IFRS 17 at the effective date.

Some figures

Nowadays, with more than US$ 13 trillion in assets under management (AUM), insurers represent 12% of the global assets of listed companies that use IFRS Standards.[2]

According to a study made by the IASB[3], there are 449 insurance companies in the world, life and non-life, that use IFRS. Among them, life insurances represent 96 companies and manage US$ 7.5 trillions assets under management (AUM), that represents 56% of the total AUM in the insurance sector. A significant amount knowing that life insurances will probably be the insurance sector where the implementation of IFRS 17 will be more challenging because of the variable duration of the insurance contracts.



The new computation of the technical provisions

With IFRS 17, new concepts that can significantly impact insurers. We will cover both insurance and non-insurance components. Indeed, some insurance contracts gather financial instruments that will have to be separated from the insurance side[4]. There is also the “fulfillment cash flow” which equals to the present value of the future cash flow plus the risk adjusted. The” contractual service margin (CSM)” is the unearned profit. The “level of aggregation” refers to the creation of portfolios of contracts where those are gathered together given their similar risks.  All those new concepts make IFRS 17 a big challenge for insurers. It won’t only impact the accounting practices but also the entire organizational process from the operational to the strategical one.

Until now, the technical provisions were computed by applying the best estimate plus the inherent risk. Now, the technical provisions are based on the fulfillment cash flow plus the CSM. This new computation could significantly vary depending on the level of aggregation. Indeed, the way the insurer will manage his portfolio of contracts will impact differently his result. The objective of the fulfillment cash flow is to know which insurance contract is onerous, non-profitable, and which one is on the contrary profitable.

 The level of aggregation and the result

The level of aggregation allows insurers to group contracts that have similar features as the risk, the coverage period, the kind of contracts type (life-insurance, car insurance, annuities, …). In a nutshell, this concept has been developed in order to reflect the reduced risk by issuing similar contracts when measuring profitability. Although the financial information will be more useful and transparent, aggregating at a too high level could potentially lead to the opposite.

               The process results in three steps:

  1. Identify portfolios of insurance contracts

  2. Set-up cohort portfolios depending their insuance time (3 months, 6 months,..)

  3. Divide portfolios into 3 categories:

    • onerous contracts

    • remaining contracts in the current portfolio

    • contracts that have no significant probability of becoming onerous

The above steps mentioned allow to determine which contracts will be included in which group and how they will be divided. The other goal is also to determine the profitability profile of those groups for the reporting. It will be crucial for insurers. Indeed, among the issues that occur when considering the level of aggregation, i.e. the impact on the CSM or the change in the financial reporting, insurers will have to implement solutions that can value properly the risk of those contracts. In that context, a tool that will be able to define different portfolios with different features corresponding to the insurance contracts in scope could be really useful.


As required by IFRS 17, onerous contracts have to be automatically accounted as a loss in the P&L accounts unlike the profitable ones whose value have to be amortized during the lifetime of the contract. Meaning that the computation of the fulfillment cash flow will directly impact the insurers’ results. Nevertheless, this risk could change over time. Thus the estimates used to define the current risk will have to be recomputed by the insurer at each reporting date.

               For example, if three contracts are grouped, because of their similar risks, and the year after it occurs that one of them increases in expected cash outflow while the two others decrease in expected cash outflows, the CSM could remain unchanged. Now if we suppose that these three contracts were not grouped in one portfolio, the insurer would have to account a loss in line with the variation of cash outflow of the onerous contract. This situation gives an unfair image to the market. Because of that, the contract, whose expected cash outflow are increasing, has to be taken apart and be booked as a loss. The only exception happens when the contract becomes onerous because of a regulatory restriction. In that case, it is allowed to keep contracts in one group. An example concerning this exception is when the regulator does not allow the insurer to increase the premium for an onerous contract. The premium remains unchanged and the contract becomes onerous.

               Adding insurance contracts in portfolio that was created before could be possible. The apart contract must be issued less than one year before. It is the cohort concept.

How to implement IFRS 17?

               At first glance IFRS 17 could frighten insurers. The answers to this big challenge have to be managed the soonest as possible. What is clear so far is that IFRS 17 provides for some interpretations. Solutions to implement the Standard within the company have to be tailor-made.


First of all, companies have to assess their current situation concerning the insurance contracts they issue. They have also to assess the impact of IFRS 17 on their businesses. This needs several internal decisions concerning the computions assumptions. It is crucial to know thoroughly the impact in terms of financial resources and also to identify which processes will have to change.


Then, knowing exactly how insurance contracts are composed is fundamental in order to be able to group them into different portfolios. Do those contracts face similar risks? Are they managed together? Will the risk vary likewise?

Solution tool

 The next step is to develop a program whose role is to integrate the new computation in the valuation of the insurance contracts. It will have to be able to readjust the fulfillment cashflow for each reporting date. It will also provide an accurate status concerning the contracts evolution.

               To reach this step, companies need technical abilities as well as appropriate resources in terms of people. Those people might be coming from areas that will be impacted by IFRS 17:

·        IT members to actuarial staff

·        business analyst

·        business developer,

·        accounting staff

·        …

However, it could be also interesting to involve external specialists in order to coordinate the project across all departments involved and bring an external view.

Transition period

               The IASB allows companies to apply IFRS 17 requirements earlier than the effective date provided that IFRS 9 and IFRS 15 are applied. In addition, a transition date has been put in place and will start from the 1st January 2020. It will give insurers one year to test their new programs in order to ensure full compliance by the effective date.

 For the existing contracts, there are three different approaches depending on the availability of the information:

·        the full retrospective approach

·        the modified retrospective approach

·        the fair value approach.

The first could be impracticable if the past information concerning the insurance contract is no longer available. In that case, either the modified retrospective approach or the fair value approach will be applied. It depends on the information insurer has. Is the available information adequate to achieve the closest outcome to the full retrospective application?  If not the fair value approach will be applied.

The open question remains, however, the following: until when shall the insurer go back in the past to apply the transition approaches to their existing insurance contracts? 5 years? 10 years? More?   Insurers will have to ask themselves concerning this question and justify properly their decisions.

About the Author


Chahine Mohsine is Graduated from Louvain School of Management as Business Engineer, Chahine did a Master's degree in Corporate Finance and Financial Markets. His professional path gave him an expertise in Private Equity, Insurances, Funds and also in SMEs, SRI and coaching. Chahine joined Initio Luxembourg in 2018.


[1] The computation of the value

[2] IFRS (May,2017). “IFRS 17 Effects Analysis”. Retrieved from: https://www.ifrs.org/

[3] IFRS (May,2017). “IFRS 17 Effects Analysis”. Retrieved from: https://www.ifrs.org/

[4] IFRS (May,2017). “IFRS 17 Effects Analysis”. Retrieved from: https://www.ifrs.org/