IFRS 17 measures insurance contracts in groups, at the present value of expected future cash flows plus a risk adjustment, together with a contractual service margin that holds back the expected profit and releases it as cover is provided. Losses on onerous groups are recognised at once. Groups with cover of one year or less can usually use the simpler premium allocation approach, which works much like an unearned premium reserve.

Who applies IFRS 17, and to what?

Paragraph 3 applies IFRS 17 to insurance and reinsurance contracts an entity issues, reinsurance contracts it holds, and investment contracts with discretionary participation features if it also issues insurance contracts. Appendix A defines an insurance contract as one under which the issuer accepts significant insurance risk by agreeing to compensate the policyholder if a specified uncertain future event adversely affects them. The standard applies to annual periods beginning on or after 1 January 2023 (paragraph C1).

The definition is about the contract, not the business. A company that is not an insurer can still issue insurance contracts, which is why the scope exclusions are worth reading. Paragraph 7 excludes, among other things, product warranties given by a manufacturer, dealer or retailer, which fall under IFRS 15, and employers’ obligations under employee benefit plans. Paragraph 8 allows IFRS 15 instead of IFRS 17 for fixed fee service contracts, such as some breakdown or maintenance plans, where the price is not set by reference to the individual customer’s risk, compensation is given as services rather than cash, and the insurance risk comes mainly from the customer’s use of the service.

In the UK, IFRS 17 is most relevant to insurers that report under IFRS. Insurers cannot sidestep it through the UK GAAP reduced disclosure route, because the FRS 101 definition of a qualifying entity excludes entities that are required to apply Schedule 3 to the accounts regulations and have contracts within the scope of IFRS 17. Under FRS 102, paragraph 1.6 sends insurance contracts to FRS 103 instead. A subsidiary using IFRS 19 that applies IFRS 17 must still give every IFRS 17 disclosure (IFRS 19 paragraph 4(b)).

How are contracts grouped?

Measurement happens at group level, so grouping drives the numbers. Paragraph 14 requires portfolios of contracts subject to similar risks and managed together. Paragraph 16 splits each portfolio into at least three groups at initial recognition: contracts that are onerous, contracts with no significant possibility of becoming onerous, and the rest. Paragraph 22 prevents contracts issued more than one year apart from sitting in the same group, which creates annual cohorts. Once set, groups are not reassessed (paragraph 24).

A group is recognised from the earliest of the start of its coverage period, the date the first premium is due and, for an onerous group, the date it becomes onerous (paragraph 25).

How does the general model measure a group on day one?

Paragraph 32 measures a group at the total of:

  • Fulfilment cash flows, made up of estimates of future cash flows within the contract boundary, an adjustment for the time value of money and financial risk, and a risk adjustment for non financial risk.
  • The contractual service margin, which is the unearned profit.

The cash flow estimates must be unbiased, probability weighted and current (paragraph 33). Discount rates must reflect the characteristics and liquidity of the insurance cash flows and be consistent with observable market prices (paragraph 36). The risk adjustment is the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows from non financial risk (paragraph 37).

Paragraph 38 then sets the contractual service margin at the amount that means no income or expense arises on initial recognition. If the fulfilment cash flows are a net inflow, that inflow becomes the margin. If they are a net outflow, the group is onerous: paragraph 47 requires the loss to go straight to profit or loss and the margin is zero.

What happens to the contractual service margin afterwards?

At each reporting date the liability splits into the liability for remaining coverage, which contains the fulfilment cash flows for future service and the margin, and the liability for incurred claims (paragraph 40). For contracts without direct participation features, paragraph 44 rolls the margin forward for:

  • new contracts added to the group;
  • interest accreted at the discount rates locked in at initial recognition (paragraph B72(b));
  • changes in fulfilment cash flows that relate to future service, unless an increase exceeds the remaining margin, in which case the excess is a loss (paragraph 48);
  • currency differences; and
  • the amount released to profit or loss for services provided in the period.

The release is based on coverage units. Paragraph B119 allocates the margin equally to each coverage unit provided in the period and expected in future, reflecting the quantity of benefits and the expected coverage period. Changes in estimates about past service, such as claims already incurred, do not adjust the margin and go straight to insurance service expenses (paragraph 42).

What does that look like in numbers?

Illustration only. An insurer writes a group of three year contracts. At initial recognition the present value of premiums is 1,000, the present value of expected claims and expenses is 820 and the risk adjustment is 60. The fulfilment cash flows are therefore a net inflow of 120, so the margin is 120 and no profit is recognised on day one.

If coverage units are equal across the three years and interest accretion is ignored for simplicity, about 40 of margin is released each year. Suppose at the end of year one the expected claims for future cover rise by 30. That change relates to future service, so it reduces the remaining margin of 80 to 50 rather than hitting profit immediately, and the release in each of the last two years falls to 25.

Had the expected claims and expenses at inception been 1,080 instead, the fulfilment cash flows would be a net outflow of 80. The group would be onerous, the loss of 80 would be recognised immediately, and a loss component would be tracked within the liability (paragraph 49).

When can the premium allocation approach be used?

Paragraph 53 allows the simplified approach if, at inception of the group, either the coverage period of each contract is one year or less, or the entity reasonably expects the result for the liability for remaining coverage would not differ materially from the general model. Paragraph 54 says that second test fails where significant variability in fulfilment cash flows is expected before a claim is incurred, for example with long coverage periods or embedded derivatives.

Under the approach, the liability for remaining coverage starts as premiums received less acquisition cash flows and is then released over the coverage period (paragraph 55). Paragraph 59(a) lets acquisition costs be expensed as incurred where each contract’s coverage is no more than one year. Discounting of that liability is not needed if the gap between service and premium due date is expected to be no more than a year (paragraph 56). The liability for incurred claims is still measured at fulfilment cash flows, although discounting can be skipped for claims expected to be paid within one year of being incurred (paragraph 59(b)). If facts and circumstances indicate a group is onerous, the entity must compare the liability with the fulfilment cash flows and recognise any shortfall (paragraph 57).

Most general insurance written on annual policies falls within the first test. Longer term business, including most life and annuity books and many multi year construction or warranty covers, generally needs the general model.

How are results presented?

Paragraph 83 requires insurance revenue that depicts the services provided, at the consideration the entity expects in exchange, and paragraph 85 forbids presenting premium information in profit or loss if it is inconsistent with that. Investment components, amounts repaid to policyholders whether or not the insured event happens, are excluded from both revenue and expenses. Insurance service expenses (paragraph 84) cover incurred claims and other insurance service costs, and insurance finance income or expenses (paragraph 87) capture the effect of the time value of money and financial risk. Contracts with direct participation features use a variation in which the margin also absorbs changes in the entity’s share of the fair value of the underlying items (paragraph 45). Reinsurance contracts held are measured separately, with their own margin (paragraphs 29(b) and 66).

What mistakes come up most often?

  • Overlooking insurance contracts issued outside an insurance company, such as guarantees or service plans that transfer significant insurance risk, or applying IFRS 15 to fixed fee contracts that do not meet all three paragraph 8 conditions.
  • Grouping contracts issued more than a year apart, or reassessing groups after initial recognition.
  • Recognising day one profit. Under the general model any expected profit sits in the margin.
  • Running changes in past service estimates through the margin, or future service changes straight through profit.
  • Assuming the premium allocation approach applies to contracts longer than a year without testing paragraph 53(a).
  • Presenting gross written premiums as revenue.

For the interaction with financial assets that back insurance liabilities, see our guide to IFRS 9 expected credit losses, and for when IFRS is required at all, see when UK companies use IFRS.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.