Mastering IFRS 17: A Comprehensive Guide to Acing Your Interview

The implementation of IFRS 17, the new accounting standard for insurance contracts, has become a significant focus in the financial industry. As companies strive to comply with this complex standard, the demand for professionals with a deep understanding of IFRS 17 has skyrocketed. If you’re preparing for an interview related to IFRS 17, it’s crucial to demonstrate your expertise and knowledge of the standard’s intricacies.

In this article, we’ll delve into the most commonly asked IFRS 17 interview questions and provide you with insightful answers to help you ace your interview. We’ll cover a wide range of topics, from the measurement models and transition approaches to the impact on financial statements and key performance indicators.

Understanding the IFRS 17 Measurement Models

One of the core aspects of IFRS 17 is the introduction of three measurement models: the General Measurement Model (GMM), the Premium Allocation Approach (PAA), and the Variable Fee Approach (VFA). Interviewers are likely to assess your knowledge of these models and their applicability.

1. What are the three measurement models defined in IFRS 17, and when should each be used?

The three measurement models defined in IFRS 17 are:

1. General Measurement Model (GMM): This is the fundamental model applicable to all types of insurance contracts, except for those that meet the criteria for the other two models. It recognizes the profit margin, known as the “Contractual Service Margin” (CSM), at the inception of the contract to avoid immediate recognition in the income statement.

2. Premium Allocation Approach (PAA): This simplified approach can be used for short-term contracts (typically less than one year) or contracts with a longer term if the PAA results are not significantly different from the GMM.

3. Variable Fee Approach (VFA): This model is mandatory for long-term life insurance contracts with direct profit participation features, such as unit-linked and index-linked products. It recognizes the variable nature of the insurer’s fee by adjusting the CSM based on changes in the underlying items.

The choice of measurement model depends on the nature and characteristics of the insurance contracts being accounted for.

2. Can you explain the components of the “Liability for Remaining Coverage” (LRC) under the General Measurement Model?

Under the General Measurement Model, the Liability for Remaining Coverage (LRC) consists of three components:

1. Present Value of Future Cash Flows (PVFCF): This represents the present value of all future cash flows from premiums, insurance benefits, and costs attributable to the contract, discounted using the current yield curve.

2. Risk Adjustment (RA): This is a risk premium for the uncertainty associated with the PVFCF, representing the compensation an entity requires for bearing the uncertainty about the amount and timing of future cash flows.

3. Contractual Service Margin (CSM): This is the profit originally priced into the contract, shown as a separate component of the technical provisions. It serves as a buffer to absorb fluctuations in earnings resulting from changes in assumptions regarding future cash flows.

3. How is the Contractual Service Margin (CSM) treated under the Variable Fee Approach?

Under the Variable Fee Approach, the Contractual Service Margin (CSM) is not a fixed amount but rather a variable fee. It is adjusted based on changes in the fair value of the underlying items, such as investments backing the insurance contracts. This approach aims to reflect the variable nature of the insurer’s fee by adjusting the CSM for changes in the underlying items’ fair value.

Transition Approaches and the Impact on Financial Statements

IFRS 17 requires a retrospective application, which can be challenging for contracts that have been in force for an extended period. Interviewers may inquire about the transition approaches and their implications for financial statements.

4. What are the transition approaches available under IFRS 17, and when might each be appropriate?

IFRS 17 provides three transition approaches for initially applying the standard:

1. Full Retrospective Approach: This approach involves applying IFRS 17 as if it had always been in effect, requiring the reconstruction of historical data and calculations. It is the preferred approach but may not be feasible in certain circumstances.

2. Modified Retrospective Approach: This is a simplified version of the Full Retrospective Approach, where certain practical expedients and modifications are allowed to ease the retrospective application.

3. Fair Value Approach: This approach is used when the Full Retrospective Approach or the Modified Retrospective Approach is impracticable. It requires measuring the CSM at the transition date as the difference between the fair value of the insurance contracts and the PVFCF and RA components.

The choice of transition approach depends on the availability of historical data, the complexity of the insurance contracts, and the feasibility of applying the retrospective approaches.

5. How will the implementation of IFRS 17 impact the presentation of an insurance company’s income statement?

The implementation of IFRS 17 will significantly impact the presentation of an insurance company’s income statement:

• Insurance Revenue: This will replace the traditional “premium” line item and will consist of the discounted estimates of future cash flows from premiums, insurance benefits, costs, release of risk adjustment, and the release of the Contractual Service Margin.

• Insurance Service Expenses: This will reflect the actual insurance services and costs incurred during the period, separate from the expected amounts included in Insurance Revenue.

• Insurance Finance Income/Expense: This new line item will capture the interest accretion on the present value of insurance liabilities, similar to the present value calculation of interest on technical provisions under current accounting standards.

• Combined Ratio: The Combined Ratio, previously applied primarily in property insurance, will become relevant across all lines of business due to the separate treatment of savings premiums and interest components.

The income statement presentation will vary based on the measurement model applied, with the Variable Fee Approach resulting in a more stable earnings profile driven by the release of the Contractual Service Margin.

Key Performance Indicators and Reinsurance Accounting

Interviewers may also delve into the impact of IFRS 17 on key performance indicators and the accounting treatment of reinsurance contracts.

6. What are the potential new key performance indicators or ratios that may arise under IFRS 17?

The introduction of the Contractual Service Margin (CSM) under IFRS 17 will likely give rise to new key performance indicators and ratios:

• CSM Analysis: The CSM represents the total expected future profitability of the insurance business. Analyzing the CSM and its changes can provide insights into the sustainability of future results and the impact of new business written.

• CSM Coverage Ratio: This ratio, calculated as the CSM divided by the Present Value of Future Cash Flows, can indicate the profitability and pricing adequacy of insurance contracts.

• Insurance Revenue Ratio: This ratio, calculated as Insurance Revenue divided by the Present Value of Future Cash Flows, can provide insights into the expected profitability and pricing of insurance contracts.

These new metrics, along with the existing Combined Ratio, will become crucial in assessing the performance and profitability of insurance companies under IFRS 17.

7. How should reinsurance contracts be accounted for under IFRS 17?

Under IFRS 17, reinsurance contracts (both assumed and ceded) follow the same criteria and measurement models as primary insurance contracts, with the exception that the Variable Fee Approach cannot be used for reinsurance contracts.

Reinsurance contracts must be combined and presented separately in a dedicated line item in the income statement, replacing the traditional “gross” and “net” presentation of premiums and claims.

It’s important to note that the measurement model used for reinsurance contracts can be different from the model applied to the underlying primary insurance contracts, potentially leading to accounting mismatches that need to be carefully managed.

Conclusion

Preparing for an IFRS 17 interview requires a comprehensive understanding of the standard’s complexities, measurement models, transition approaches, and impact on financial statements and key performance indicators. By thoroughly studying the topics covered in this article and practicing your responses, you’ll be well-equipped to demonstrate your expertise and stand out as a strong candidate during the interview process.

Remember, the implementation of IFRS 17 is a significant undertaking for insurance companies, and your knowledge and ability to articulate the intricacies of the standard will be highly valued. Stay up-to-date with the latest developments, continue to expand your understanding, and approach your interview with confidence. With dedication and preparation, you’ll be well on your way to securing a rewarding role in the dynamic field of IFRS 17 implementation and accounting for insurance contracts.