IFRS 17 Insurance Contracts became effective for annual reporting periods beginning on or after 1 January 2023. For most insurers, the first years of reporting under the standard are now complete. The transition programmes, often among the largest finance change projects the organisations had ever undertaken, have been closed, the project teams disbanded, and the new numbers published.
Yet in our work with insurers since go-live, a consistent picture has emerged. Many organisations achieved compliance, but not a sustainable steady state. Processes that were built under deadline pressure remain manual and fragile. Judgements made quickly during transition have not been revisited. And the finance teams responsible for producing IFRS 17 results each quarter are often working harder than they did under the previous regime.
This article sets out the gaps we most commonly find, why they matter, and what we recommend insurers prioritise.
A brief reminder of what changed
IFRS 17 replaced IFRS 4, which had allowed insurers to continue using a wide variety of local accounting practices. The new standard introduced a consistent measurement framework for insurance contracts, built around three components:
- Fulfilment cash flows: the present value of expected future cash flows, plus an explicit risk adjustment for non-financial risk.
- The contractual service margin (CSM): the unearned profit on a group of contracts, released to profit or loss as insurance services are provided.
- Level of aggregation: contracts grouped by portfolio, by profitability (onerous at inception, no significant possibility of becoming onerous, and the remainder) and by annual cohort.
The standard offers three measurement approaches: the general measurement model, the premium allocation approach (PAA) as a simplification for eligible (typically short-duration) contracts, and the variable fee approach for contracts with direct participation features.
The effect was a fundamental change in how insurance profit is recognised and presented. Premiums no longer appear as revenue in the way they once did; insurance revenue now reflects the services provided in the period. For many stakeholders, the financial statements became almost unrecognisable.
Gap 1: Fragile, spreadsheet-heavy close processes
The most common issue we see is operational rather than technical. To meet the transition deadline, many insurers built critical parts of the IFRS 17 process in spreadsheets and end-user computing tools, intending to replace them later. In many cases, "later" has not arrived.
Typical examples include:
- CSM roll-forward calculations maintained in large, interlinked workbooks.
- Manual adjustments between actuarial output and the accounting engine.
- Disclosure tables compiled by hand from multiple sources.
- Reconciliations between the actuarial and finance ledgers performed outside any controlled system.
These processes work until the person who built them leaves, a formula breaks, or the auditor asks for evidence of controls over them. They also constrain the close timetable. Several insurers we have worked with are taking materially longer to close under IFRS 17 than they did under IFRS 4.
We recommend a structured end-user computing inventory: identify every spreadsheet and manual step in the IFRS 17 process, assess each for materiality and complexity, and prioritise the highest-risk items for automation or, at minimum, for formal controls.
Gap 2: Coverage units and CSM release that nobody revisits
The CSM is released to profit or loss based on coverage units, which reflect the quantity of benefits provided and the expected coverage period. The choice of coverage units is a significant judgement, and small changes can materially shift the timing of profit recognition.
During transition, coverage unit methodologies were often designed quickly and applied consistently afterwards without review. Common weaknesses include:
- Coverage units that do not reflect investment-return services where the contract provides them.
- Inconsistent treatment of similar products across different portfolios or entities.
- No documented rationale explaining why the chosen measure best represents the service provided.
- Discounting choices for coverage units that were never formally approved.
Because the CSM is a key driver of reported profit and a closely watched metric by analysts, these judgements deserve periodic review and clear documentation. We recommend an annual coverage unit review as part of the reporting calendar.
Gap 3: Onerous contract identification and loss components
Groups of contracts that are onerous at initial recognition must be identified, and a loss component recognised immediately. Subsequent changes can make a group onerous, or reverse a previous loss component.
In practice, this area creates recurring difficulty:
- Data granularity. Profitability testing requires expected cash flows at a level of detail that legacy actuarial models did not always produce.
- Loss component tracking. Once a loss component exists, subsequent changes in fulfilment cash flows must be allocated systematically between the loss component and the liability for remaining coverage. Many insurers track this manually.
- PAA onerous testing. Under the PAA, contracts are presumed not to be onerous unless facts and circumstances indicate otherwise. Some insurers have no clear process for identifying when those facts and circumstances arise.
We frequently find that the onerous contract process depends on a small number of experts with no documented procedure. That creates key-person risk in an area that directly affects reported profit.
Gap 4: Reinsurance contracts held
Reinsurance contracts held are measured separately from the underlying contracts, with their own CSM. This creates potential accounting mismatches, which the standard addresses in part through the loss-recovery component: where an insurer recognises a loss on onerous underlying contracts, a corresponding gain can be recognised on the reinsurance held, if the conditions are met.
This is one of the most technically demanding areas of the standard, and it is where we see the most variation in implementation quality. Common issues include inconsistent assumptions between the underlying and reinsurance measurements, incorrect identification of which underlying contracts a reinsurance treaty covers, and loss-recovery components that are calculated but not properly tracked through subsequent periods.
Gap 5: The interaction with IFRS 9
Most insurers adopted IFRS 9 Financial Instruments alongside IFRS 17. The two standards interact closely: IFRS 17 determines how insurance liabilities are measured, and IFRS 9 determines how the assets backing them are measured.
Where the accounting policy choices under the two standards are not aligned, for example, in the use of the option to disaggregate insurance finance income or expense between profit or loss and other comprehensive income, insurers can create avoidable volatility in profit or loss. We still see insurers whose asset and liability accounting choices were made by different teams, at different times, with limited coordination.
A joint review of IFRS 9 classification and IFRS 17 finance income or expense policy, focused on the resulting volatility, is often a worthwhile exercise.
Gap 6: Disclosures and the investor narrative
IFRS 17 disclosures are extensive: reconciliations of opening to closing balances for insurance contract liabilities, analyses of insurance revenue, CSM expected release patterns, and explanations of significant judgements.
Beyond compliance, the more important challenge is communication. Analysts and investors have had to learn a new language of insurance profitability. The insurers that have communicated most effectively are those that have:
- Explained clearly how the CSM moves from one period to the next and what drives the changes.
- Linked IFRS 17 metrics to the business's existing performance measures, including solvency metrics.
- Been consistent in the non-GAAP measures they present and how they reconcile to reported results.
Under IFRS 17, the quality of the explanation matters almost as much as the quality of the number.
Gap 7: Transition judgements that still shape results
Many insurers used the modified retrospective or fair value approach at transition for older contracts, because full retrospective application was impracticable. These choices determined the opening CSM for those groups, and therefore affect reported profit for as long as those contracts remain in force.
The transition approach is fixed, but the documentation supporting it is not always adequate. Where the basis for the fair value measurement, or the modifications applied, is poorly documented, insurers can struggle to answer questions from auditors, regulators or analysts years later, after the people involved have moved on. Consolidating and archiving the transition evidence is a relatively small investment that removes a lasting risk.
What we recommend insurers prioritise
Not every insurer has every gap, and the right priorities depend on the portfolio, the operating model and the maturity of the existing processes. But a typical post-implementation roadmap includes:
- A controls and end-user computing review of the full IFRS 17 production process, with a remediation plan for high-risk manual steps.
- A judgement and methodology review covering coverage units, risk adjustment, discount rates, onerous contract identification and reinsurance, with updated documentation.
- A close process redesign targeting a timetable that is at least as fast as the pre-IFRS 17 close.
- Automation of the most burdensome steps, particularly CSM roll-forward, loss component tracking and disclosure preparation.
- An investor communication review to ensure the narrative explains performance clearly and consistently.
Moving from compliance to capability
The first phase of IFRS 17 was about meeting the deadline. The next phase is about building a process that is reliable, efficient and genuinely useful, one where the finance function can explain the numbers confidently and spend its time on analysis rather than production.
Our IFRS practice has supported insurers through transition and into steady state. If your IFRS 17 process feels harder than it should, or you are not confident that the judgements made at transition still hold, we would be glad to discuss what a focused review could achieve.