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.
As outlined in Example 1 in the October 2021 edition of Accounting News, we assumed the following fact pattern.
BDO Pet Insurance Ltd has written 100 3-year insurance policies to commence on 1 July 2021.
The policies insure the holder for up to 50% of any eligible veterinarian bills they incur in respect to their pets during the coverage period.
Each holder of a policy is required to pay an annual $90 premium, payable on the first day of each year of the coverage period.
For the purposes of measuring the insurance contracts under IFRS 17, and based on past experience with similar types of insurance policies, BDO Pet Insurance Ltd adopts the following assumptions:
For the purposes of the following example (Example 2), we will assume the same fact pattern as above, except for the following:
Based on the foregoing information, BDO Pet Insurance Ltd measures the portfolio of pet insurance policies on initial recognition as follows:
Table 1
From Example 1 | $ |
Estimate of the present value of future cash inflows | (25,735) |
Estimate of the present value of future cash outflows | 19,063 |
Estimate of the present value of future (net) cash flows | (6,672) |
Risk adjustment for non-financial risk | 953 |
Fulfilment cash flows | (5,719) |
Contractual service margin | 5,719 |
Insurance contract (asset)/liability on initial recognition | 0 |
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
Year ended 30 June 2022 | Estimates of the present value of future cash flows ($) | Risk adjustment for non-financial risk ($) | Contractual service margin ($) | Insurance contract (asset)/ liability ($) |
Opening balance – (asset)/liability | 0 | 0 | 0 | 0 |
Changes related to future service: new insurance contracts | (6,672) | 953 | 5,719 | 0 |
Cash inflows | 9,000 | 0 | 0 | 9,000 |
Insurance finance expenses | 953 | 48 | 286 | 1,287 |
Insurance finance income | (837) | 0 | 0 | (837) |
Changes related to current service income | 0 | (398) | (2,001) | (2,399) |
Cash outflows | (7,000) | 0 | 0 | (7,000) |
Closing balance – (asset)/liability | (4,556) | 603 | 4,004 | 51 |
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
Year ended 30 June 2023 | Estimates of the present value of future cash flows ($) | Risk adjustment for non-financial risk ($) | Contractual service margin ($) | Insurance contract (asset)/ liability ($) |
Opening balance – (asset)/liability | (4,556) | 603 | 4,004 | 51 |
Changes related to future service: new insurance contracts | 0 | 0 | 0 | 0 |
Cash inflows | 9,000 | 0 | 0 | 9,000 |
Insurance finance expenses – refer (a) below | 521 | 24 | 200 | 745 |
Insurance finance income | (343) | 0 | 0 | (343) |
Changes related to current service – refer (b) below | 500 | (294) | (2,102) | (1,896) |
Changes related to future service – refer (c) below | 589 | (45) | (763) | (218) |
Cash outflows | (7,500) | 0 | 0 | (7,500) |
Closing balance – (asset)/liability | (1,788) | 288 | 1,339 | (161) |
Table 4
Year ended 30 June 2024 | Estimates of the present value of future cash flows ($) | Risk adjustment for non-financial risk ($) | Contractual service margin ($) | Insurance contract (asset)/ liability ($) |
Opening balance – (asset)/liability | (1,788) | 288 | 1,339 | (161) |
Changes related to future service: new insurance contracts | 0 | 0 | 0 | 0 |
Cash inflows | 9,000 | 0 | 0 | 9,000 |
Insurance finance expenses – refer (a) below | 288 | 12 | 67 | 367 |
Insurance finance income | 0 | 0 | 0 | 0 |
Changes related to current service – refer (b) below | (400) | (300) | (1,406) | (2,106) |
Changes related to future service | 0 | 0 | 0 | 0 |
Cash outflows | (7,100) | 0 | 0 | (7,100) |
Closing balance – (asset)/liability | 0 | 0 | 0 | 0 |
From Tables 3 and 4 directly above, it is relevant to note that:
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.