Applying the General Measurement Model in IFRS 17 Insurance Contracts to a portfolio of insurance contracts – the impacts of changes in assumptions

In the October 2021 edition of Accounting News, we looked at the accounting for a relatively simple portfolio of insurance contracts under IFRS 17 Insurance Contracts using a fictitious worked example, assuming all of the assumptions established at the commencement of the contracts were met over the terms of the contracts.

In this month’s edition, we will modify some of the assumptions we used in Example 1 from the October 2021 edition of Accounting News to demonstrate how differences between assumed and actual experience can impact the measurement of insurance contracts under IFRS 17.

Example 2

As outlined in Example 1 in the October 2021 edition of Accounting News, we assumed the following fact pattern.

For the purposes of the following example (Example 2), we will assume the same fact pattern as above, except for the following:

• Actual annual cash outflows for the year ended 30 June 2023 are $7,500
• At 30 June 2023, BDO Pet Insurance Ltd assumes the cash outflows for financial year ended 30 June 2024 will be $7,500, but actual outflows for the year are only $7,100
• The discount rate decreases to 4% per annum in the year ended 30 June 2023
• At 30 June 2023, BDO Pet Insurance Ltd assumes the discount rate for the year ended 30 June 2024 will be 4%, and this assumption proves to be correct, and
• The risk adjustment for non-financial risk reduces to 4% of the present value of the expected cash outflows during the year ended 30 June 2023, and is assumed to remain at this level for the remainder of the coverage period. This assumption also proves to be correct.

Based on the foregoing information, BDO Pet Insurance Ltd measures the portfolio of pet insurance policies on initial recognition as follows:

Table 1

As BDO Pet Insurance Ltd’s assumptions at the commencement of the insurance contracts hold for the first year of the insurance contracts, the entity would measure the insurance contracts for the year ended 30 June 2022 as follows: 

Table 2

As BDO Pet Insurance Ltd’s actual experience only started to deviate from its initial expectations during the second year (i.e. for the year ended 30 June 2023) of the three year coverage period, Tables 1 and 2 above are identical to Tables 1 and 2 provided for in Example 1 from the October 2021 edition of Accounting News. However, consistent with the changes experienced in the portfolio outlined above, in years 2 and 3 of the portfolio of insurance contracts, BDO Pet Insurance Ltd would have measured the insurance contracts as follows.

Table 3

Table 4

From Tables 3 and 4 directly above, it is relevant to note that:

1. Insurance finance expenses are calculated by using the actual discount rate for the year (claims for the reporting period are assumed to be paid at the end of the reporting period). However, in relation to the contractual service margin, paragraphs 44(b) and B72(b) of IFRS 17 require it to be measured at the discount rate determined on initial recognition of the group of insurance contracts.
2. In accordance with paragraphs 44(e) and B119 of IFRS 17, BDO Pet Insurance Ltd reduces the carrying amount of the contractual service margin by an amount attributable to current service provided under the insurance contracts. The amount is determined by identifying the coverage units in the group of contracts. These coverage units reflect the quantity of benefits provided under each contract in the group and its expected coverage duration. In this example, the service provided by BDO Pet Insurance Ltd in each period for the group of contracts is the same because all contracts are expected to provide the same amount of benefits for all three periods of coverage. Accordingly, the amount of the contractual service margin recognised in profit or loss for the year ended 30 June 2023 is $4,003 + 200/2 years. Nevertheless, there are potentially other ways in which an entity could allocate the contractual service margin over the coverage period.
3. Changes related to future service represent the financial impact of changes in input assumptions (in this case, expected future cash outflows, future discount rates and future risk adjustments for non-financial risk) that relate to service to be provided by BDO Pet Insurance Ltd over the remaining coverage period.

Next month

In next month’s edition of Accounting News, we will look at the measurement of onerous insurance contracts under the General Model in IFRS 17.