Glossary of IFRS 17 Terminology
Most of the following definitions are formally defined in Appendix A of the IFRS 17 standard. Other commonly used terms are included below.
Best estimate liability (BEL)
Although not a defined term under IFRS 17, the best estimate liability is commonly used to refer to the discounted present value of the unbiased, probability-weighted estimate of future cash flows as defined in the standard for the general measurement model applied to a group of insurance contracts.
Contractual service margin (CSM)
A component of the carrying amount of the asset or liability for a group of insurance contracts under the general measurement model representing the unearned profit the entity will recognise as it provides services under the insurance contracts in the group.
The period during which the entity provides coverage for insured events. This period includes the coverage that relates to all premiums within the boundary of the insurance contract.
Coverage units (CU)
Coverage units are used to determine the appropriate recognition of the contractual service margin in profit or loss (see Par B119).Â The number of coverage units in a group is the quantity of coverage provided by the contracts in the group, determined by considering for each contract the quantity of the benefits provided under a contract and its expected coverage duration.
A difference between:
- For premium receipts (and any related cash flows such as insurance acquisition cash flows and insurance premium taxes) â€” the estimate at the beginning of the period of the amounts expected in the period and the actual cash flows in the period; or
- For insurance service expenses (excluding insurance acquisition expenses)â€”the estimate at the beginning of the period of the amounts expected to be incurred in the period and the actual amounts incurred in the period.
The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, currency exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.
Fulfilment cash flows (FCF)
An explicit, unbiased and probability-weighted estimate (ie. expected value) of the present value of the future cash outflows minus the present value of the future cash inflows that will arise as the entity fulfils insurance contracts, including a risk adjustment for non-financial risk.
General (or Generalised) Measurement Model
The general measurement model under IFRS 17 is defined in paragraphs 29 to 52 of the standard. This term is often used however to refer to the general methodology that applies without consideration of the permitted modification of the Premium Allocation Approach or the required adjustments under the Variable Fee Approach.Â The general model includes four key elements:
- Estimates of future cash flows
- An adjustment for the time value of money using appropriate discount rates
- A risk adjustment for non-financial risk
- The contractual service margin
Group of insurance contracts
A set of insurance contracts resulting from the division of a portfolio of insurance contracts into, at a minimum, contracts written within a period of no longer than one year and that, at initial recognition:
- Are onerous, if any;
- Have no significant possibility of becoming onerous subsequently, if any; or
- Do not fall into either (a) or (b), if any.
Insurance acquisition cash flows
Cash flows arising from the costs of selling, underwriting and starting a group of insurance contracts that are directly attributable to the portfolio of insurance contracts to which the group belongs. Such cash flows include cash flows that are not directly attributable to individual contracts or groups of insurance contracts within the portfolio.
A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
Insurance contract boundary
Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which the entity can compel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with services (see paragraphs B61â€“B71). A substantive obligation to provide services ends when:
- The entity has the practical ability to reassess the risks of the particular policyholder and, as a result, can set a price or level of benefits that fully reflects those risks; or
- Both of the following criteria are satisfied:
- The entity has the practical ability to reassess the risks of the portfolio of insurance contracts that contains the contract and, as a result, can set a price or level of benefits that fully reflects the risk of that portfolio; and
- The pricing of the premiums for coverage up to the date when the risks are reassessed does not take into account the risks that relate to periods after the reassessment date.
Insurance contract with direct participation features
An insurance contract for which, at inception:
- The contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items;
- The entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and
- The entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items.
Insurance contract without direct participation features
An insurance contract that is not an insurance contract with direct participation features.
The portion of the overall profit or loss or other comprehensive income reported in the statement of financial performance that arises from incurred claims excluding the repayment of investment components under those contracts.
Insurance finance result
The portion of the overall profit or loss or other comprehensive income reported in the statement of financial performance that arises from the insurance finance income or expenses ( ie.Â investment income or financing costs reflecting the time value of money or the effects of financial risk). (See also Insurance service result)
The amount of revenue depicted in profit or loss to reflect the provision of coverage and other services arising from a group of insurance contracts that reflects the consideration to which the entity expects to be entitled in exchange for those services.
Risk, other than financial risk, transferred from the holder of a contract to the issuer.
Insurance service result
The portion of the overall profit or loss or other comprehensive income reported in the statement of financial performance that arises from the insurance revenue reduced by insurance expenses. Insurance revenue (See also Insurance finance result)
An uncertain future event covered by an insurance contract that creates insurance risk.
The amounts that an insurance contract requires the entity to repay to a policyholder even if an insured event does not occur.
Investment contract with discretionary participation features
A financial instrument that provides a particular investor with the contractual right to receive, as a supplement to an amount not subject to the discretion of the issuer, additional amounts:
- That are expected to be a significant portion of the total contractual benefits;
- The timing or amount of which are contractually at the discretion of the issuer; and
- That are contractually based on:
- The returns on a specified pool of contracts or a specified type of contract;
- Realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or
- The profit or loss of the entity or fund that issues the contract.
Liability for incurred claims (LIC)
An entity's obligation to investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been reported, and other incurred insurance expenses.
Liability for remaining coverage (LRC)
An entity's obligation to investigate and pay valid claims under existing insurance contracts for insured events that have not yet occurred (ie. the obligation that relates to the unexpired portion of the coverage period).
An insurance contract is onerous at the date of initial recognition if the fulfilment cash flows allocated to the contract, any previously recognized acquisition cash flows and any cash flows arising from the contract at the date of initial recognition in total are a net outflow (IFRS standard par 47).
A party that has a right to compensation under an insurance contract if an insured eventoccurs.
Portfolio of insurance contracts
Insurance contracts subject to similar risks and managed together.
Premium Allocation Approach (PAA)
A simplification of the Generalized Measurement Model permitted if the coverage period of contracts in a group is one year or less (See IFRS 17 standard par 53 to 59).
An insurance contract issued by one entity (the reinsurer) to compensate another entity for claims arising from one or more insurance contracts issued by that other entity (underlying contracts).
The income arising in the course of an entity's ordinary activities. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants. (IFRS Taxonomy) See also Insurance Revenue.
Risk adjustment for non-financial risk
The compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk as the entity fulfils insurance contracts.
Items that determine some of the amounts payable to a policyholder. Underlying items can comprise any items; for example, a reference portfolio of assets, the net assets of the entity, or a specified subset of the net assets of the entity.
Variable Fee Approach
A modification to the General Measurement Model for insurance contracts with direct participation features where the contractual service margin is adjusted to reflect the variable nature of the fees under those contracts.