Here is a clean, exam-ready and practical summary of IFRS 17 – Insurance Contracts, with simple examples to make each section easy to understand.

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⭐ IFRS 17 – Insurance Contracts (Summary + Practical Examples)

IFRS 17 replaces IFRS 4 and provides a consistent method for recognizing, measuring, presenting and disclosing insurance contracts.

It applies to:

• Insurance contracts issued

• Reinsurance contracts held

• Investment contracts with discretionary participation features

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1. Key Components of IFRS 17

IFRS 17 measurement is based on three building blocks:

A. Fulfilment Cash Flows (FCF)

These are expected future cash flows, discounted and adjusted for risk.

Components:

1. Expected future cash inflows (premiums)

2. Expected future cash outflows (claims, expenses)

3. Discounting (time value of money)

4. Risk Adjustment – compensation for uncertainty

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B. Contractual Service Margin (CSM)

CSM = Unearned profit that the insurer recognizes over the coverage period.

• If CSM becomes negative, the contract is onerous, and loss is recognized immediately.

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C. Measurement Models

IFRS 17 provides three models:

1. General Measurement Model (Building Block Approach – BBA)

Default model for long-term insurance.

2. Premium Allocation Approach (PAA)

Simplified model for short-term contracts (usually ≤ 1 year) such as:

• Motor insurance

• Travel insurance

3. Variable Fee Approach (VFA)

Used for participating contracts where policyholders share returns on underlying items.

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2. Recognition of Revenue

Insurance revenue is recognized based on:

• Services provided during the period

• Release of risk adjustment

• Release of CSM

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3. Presentation

Profit or loss includes:

• Insurance revenue

• Insurance service expense

• Insurance finance income/expense (interest unwinding & changes in discount rates)

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⭐ 4. Practical Examples

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Example 1: General Model (BBA) – CSM Calculation

An insurer issues a 5-year life insurance contract.

Expected future cash inflows (premiums):

= $12,000

Expected future cash outflows (claims + expenses):

= $9,000

Risk adjustment = $300

Discount effect = $200

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Fulfilment Cash Flows (FCF)

= (Inflows – Outflows – Risk Adjustment – Discounting)
= 12,000 – 9,000 – 300 – 200
= 2,500

Since this is profit, create CSM:

CSM at initial recognition = $2,500

Revenue will be recognized per year as CSM is released.

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Example 2: Onerous Contract (Loss at Initial Recognition)

Insurer issues an insurance policy with:

• Expected premiums: $5,000

• Expected claims & expenses: $6,000

• Risk adjustment: $200

• Discount effect: $0

FCF = 5,000 – 6,000 – 200 = –1,200

Since negative → onerous contract.

Accounting:

• Recognize loss of $1,200 immediately.

• No CSM because profit = negative.

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Example 3: Premium Allocation Approach (PAA)

A 1-year motor insurance contract:

• Premium received: $1,000

• Acquisition costs: $100 paid upfront

• Expected claims: $600

PAA allows treating the premium like unearned premium reserve.

At initial recognition:

• Liability for remaining coverage (LRC) = Premium – acquisition cash flows
  = 1,000 – 100
  = 900

During the policy:

• Each month revenue = 900 / 12
  = $75

Claims are expensed when incurred.

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Example 4: Revenue Recognition Under IFRS 17

Assume:

• Annual premiums = $1,200

• Expected claims = $700

• Risk adjustment released this year = $100

• CSM released this year = $150

Insurance revenue for the year:

= Premiums 1,200 – Claims (service component only) + CSM release + Risk adjustment release

Revenue = $1,450

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Example 5: Variable Fee Approach (Participating Contract)

Insurance contract linked to a pool of assets.

• Premium received: $10,000

• Policyholder shares 90% of investment returns

• Insurer keeps 10% (variable fee)

If underlying assets earn 8%:

• Total return = 10,000 × 8% = 800

• Policyholder share = 720

• Insurer’s variable fee = 80

This fee adjusts the CSM of the contract.

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⭐ Summary Table (Very Clean)