Indian Accounting Standard (Ind AS) 117 governs the recognition, measurement, presentation, and disclosure of insurance contracts. Replacing Ind AS 104, this new standard aligns with IFRS 17, aiming to bring transparency and comparability in financial statements of insurers and reinsurers. It became mandatory in India from April 1, 2023, for entities preparing financial statements under Ind AS.
The main objective of Ind AS 117 is to ensure that an entity provides relevant information that faithfully represents the contracts it issues and helps users of financial statements assess the effect insurance contracts have on the financial position, performance, and cash flows of the company.
Scope of Ind AS 117
Ind AS 117 applies to:
- Insurance contracts, including reinsurance contracts issued
- Reinsurance contracts held
- Investment contracts with discretionary participation features issued by an insurer
The standard does not apply to:
- Product warranties issued directly by a manufacturer, dealer, or retailer
- Employers’ assets and liabilities under employee benefit plans
- Financial guarantee contracts (unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts)
Definition of Insurance Contract
An insurance contract is defined as a contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects them.
Significant insurance risk exists if, and only if, an insured event could cause the issuer to pay significant additional benefits. A contract that does not transfer significant insurance risk is not classified as an insurance contract under Ind AS 117.
Key Terminologies Under Ind AS 117
- Insurance risk: Risk other than financial risk transferred from the holder of a contract to the issuer
- Coverage period: The period during which the entity provides coverage for insured events
- Fulfilment cash flows: Risk-adjusted, probability-weighted estimates of future cash flows, discounted to present value
- Contractual service margin (CSM): The unearned profit the entity will recognize as it provides services
Initial Recognition
An entity shall recognize a group of insurance contracts at the earliest of:
- The beginning of the coverage period of the group
- The date when the first payment from a policyholder in the group becomes due
- For a group of onerous contracts, when the group becomes onerous
Reinsurance contracts held are recognized at the earlier of:
- The date the underlying contracts are recognized
- The date the reinsurance contract becomes effective
Aggregation of Contracts
Contracts must be grouped at initial recognition into portfolios. A portfolio comprises contracts that are subject to similar risks and are managed together. Within each portfolio, contracts are further divided into:
- A group of contracts that are onerous at initial recognition
- A group of contracts that have no significant possibility of becoming onerous
- A group of remaining contracts
This classification ensures timely recognition of losses and prevents offsetting profitable and loss-making contracts.
Measurement Models in Ind AS 117
Ind AS 117 prescribes three models for measuring insurance contracts:
General Measurement Model (GMM)
This is the default model used unless other models apply. Under this model, insurance contract liabilities are measured as the sum of:
- Fulfilment cash flows (FCF): Includes unbiased, probability-weighted estimates of future cash flows, risk adjustment, and discounting
- Contractual service margin (CSM): Represents unearned profit
Revenue is recognized based on the coverage provided in each reporting period. CSM is amortized over the coverage period.
Premium Allocation Approach (PAA)
This is a simplified version of the GMM and is permitted for:
- Contracts with coverage period of one year or less
- Contracts where the simplification produces a measurement reasonably similar to the GMM
Under PAA, the liability for remaining coverage is measured similarly to the unearned premium reserve in traditional models, and the liability for incurred claims is measured using fulfillment cash flows.
Variable Fee Approach (VFA)
This is applicable only to insurance contracts with direct participation features. These contracts entitle the policyholder to a share of a clearly identified pool of underlying items.
The insurer’s obligation is to pay the policyholder an amount equal to the fair value of the underlying items, less a variable fee for service. The VFA adjusts the contractual service margin for changes in the fair value of the underlying items.
Fulfilment Cash Flows Components
The fulfilment cash flows under Ind AS 117 include:
- Estimates of future cash inflows and outflows arising from the contract
- Adjustment to reflect the time value of money using discount rates consistent with the characteristics of the cash flows
- Risk adjustment for non-financial risk to reflect the uncertainty in the cash flows
Entities are required to update estimates of fulfillment cash flows at each reporting date, with changes being recognized depending on their nature.
Contractual Service Margin (CSM)
The CSM is a crucial component of Ind AS 117 and represents the unearned profit from a group of insurance contracts. It is adjusted for:
- Changes in future service expectations
- Experience adjustments (if related to future service)
- Changes in discount rates (depending on accounting policy)
- Allocation to profit or loss over the coverage period
The CSM cannot be negative. If the fulfillment cash flows indicate a loss on initial recognition or subsequent measurement, the contract is classified as onerous and the loss is recognized immediately in profit or loss.
Onerous Contracts
A group of insurance contracts is considered onerous if the fulfillment cash flows exceed the total expected inflows, including CSM. In such cases, the entire loss is recognized in profit or loss, and no CSM is recorded.
Onerous contracts must be tested at initial recognition and at each reporting period. Any changes in assumptions or actual experience must be analyzed to determine whether a contract or group of contracts has become onerous.
Initial Measurement of Reinsurance Contracts Held
Reinsurance contracts held provide the insurer with compensation for losses on one or more underlying insurance contracts. At initial recognition, the measurement includes:
- Fulfilment cash flows: Present value of expected inflows and outflows
- Contractual service margin: Represents the expected net gain on the contract
The risk adjustment in reinsurance contracts reflects the risk transferred to the reinsurer and may differ from the risk adjustment for direct insurance contracts.
Subsequent Measurement of Reinsurance Contracts Held
After initial recognition, the carrying amount of reinsurance contracts held is updated to reflect:
- Changes in estimates of fulfilment cash flows
- Allocation of the contractual service margin
- Gains or losses recognized in profit or loss
If there is a loss-recovery component, such as when an underlying contract becomes onerous, the reinsurer’s compensation for the loss must be accounted for appropriately.
Financial Statement Presentation
Ind AS 117 requires specific presentation of insurance contract balances:
Statement of Financial Position
The entity must present separately:
- Assets and liabilities arising from insurance contracts issued
- Assets and liabilities from reinsurance contracts held
Insurance and reinsurance contracts may not be offset unless specific criteria are met.
Statement of Profit and Loss
Revenue recognition follows the pattern of service delivery, and expenses are matched accordingly. Entities must present:
- Insurance revenue
- Insurance service expenses
- Insurance finance income or expenses (separately, based on accounting policy)
Disaggregation is encouraged to reflect the nature of the service and the risk profile.
Transition Requirements
Entities adopting Ind AS 117 for the first time can choose from three transition approaches:
Full Retrospective Approach
This method requires the restatement of prior periods using full historical data. It provides maximum comparability but may be impractical due to data limitations.
Modified Retrospective Approach
If full retrospective application is impractical, entities can apply a modified approach using reasonable estimates.
Fair Value Approach
As a last resort, entities can use the fair value of contracts at the transition date to measure the contractual service margin.
The chosen transition method must be applied consistently across portfolios and accompanied by detailed disclosures explaining the approach and its impact on comparability.
Transition Disclosures
Ind AS 117 requires entities to disclose:
- The transition approach used
- Reconciliations of contract balances from previous standards to Ind AS 117
- The impact of transition on equity
- Key assumptions and estimation techniques used during transition
These disclosures ensure users understand the effect of transition and facilitate meaningful comparisons.
Interaction with Other Ind AS Standards
- Ind AS 107: Requires disclosures about financial instruments embedded in insurance contracts
- Ind AS 109: Governs recognition and measurement of investment components if separated
- Ind AS 1: Affects classification and presentation of insurance contract liabilities
- Ind AS 115: May apply to service components if separated from insurance contracts
Understanding how Ind AS 117 interacts with these standards is crucial for accurate reporting and compliance.
Introduction to Subsequent Measurement
Once an insurance contract has been initially recognized and measured under Ind AS 117, the next critical aspect is its subsequent measurement. This phase determines how the contract’s value evolves over time, impacting the insurer’s financial statements.
Subsequent measurement ensures that the carrying amount of the insurance contract reflects the current expectations about future cash flows, risk adjustment, and the contractual service margin (CSM). Entities must reassess these elements at each reporting date.
General Model for Subsequent Measurement
Under the general model, the insurance liability is remeasured at each reporting period using updated estimates of:
- Fulfilment cash flows
- Risk adjustment for non-financial risk
- Contractual service margin (CSM)
The updated fulfilment cash flows are reassessed to reflect any changes in expected future cash inflows and outflows. The CSM is adjusted to reflect the changes in these estimates unless the changes relate to current or past services, which are recognized in profit or loss.
Adjusting the CSM
The CSM is adjusted for changes in fulfilment cash flows relating to future service. These include:
- Changes in estimates of future cash flows
- Changes in risk adjustment for future service
- The effect of time value of money
If the change leads to a decrease in fulfillment cash flows, it increases the CSM, thereby deferring profit recognition. If the change increases the fulfillment cash flows beyond the carrying amount of the CSM, a loss is recognized in profit or loss.
Unwinding of Discount
The effect of the time value of money is recognized through the unwinding of discount. The interest accretion on the liability is calculated using the locked-in discount rate determined at the initial recognition of the group of contracts.
Premium Allocation Approach (PAA)
For contracts that meet the eligibility criteria, entities may apply the Premium Allocation Approach, a simplified measurement model. It approximates the general model but is less complex and burdensome.
Under the PAA, the liability for remaining coverage is initially measured as the premium received minus acquisition cash flows. Subsequent measurement includes:
- Adding any premiums received
- Deducting revenue recognized as insurance services are provided
- Adjusting for changes in the liability for incurred claims
This approach is typically used for short-duration contracts like general insurance.
Measurement of Liability for Incurred Claims
The liability for incurred claims is measured as the fulfilment cash flows related to those claims. This includes:
- Probability-weighted estimates of future payments to settle claims
- An explicit adjustment for non-financial risk
- The effect of discounting where material
Discounting is applied to reflect the time value of money, unless the claims are expected to be settled within one year.
Onerous Contracts and Loss Components
If a group of insurance contracts becomes onerous, the entity recognizes a loss component. A contract is onerous if the fulfilment cash flows exceed the carrying amount of the liability, including the CSM.
When a loss component is recognized:
- The excess is recognized in profit or loss
- The CSM is eliminated
- The liability is adjusted upward
The loss component is tracked separately and reversed only when future changes reduce the excess fulfillment cash flows.
Contract Modifications and Derecognition
Ind AS 117 requires derecognition of an insurance contract only when it is extinguished—i.e., when the obligation specified in the contract is discharged, cancelled, or expires.
In the case of contract modifications:
- If a modification results in a substantial change in the contract’s terms, the old contract is derecognized and the new contract is recognized
- Insurers must reassess the classification, measurement, and grouping of the new contract
Examples of substantial modifications include significant changes to coverage, premiums, or contract boundaries.
Presentation in Financial Statements
Ind AS 117 significantly changes how insurance contracts are presented in financial statements. The standard separates insurance revenue, insurance service expenses, and insurance finance income or expenses.
Statement of Profit and Loss
The profit and loss account must show:
- Insurance revenue
- Insurance service expenses
- Insurance service result
- Insurance finance income or expenses
Revenue reflects the release of CSM, risk adjustment, and incurred claims. Service expenses include claims incurred, acquisition costs, and maintenance costs. Finance income or expense may be presented separately or disaggregated based on accounting policy choices for discount rates.
Statement of Financial Position
The balance sheet includes:
- Assets for reinsurance contracts held
- Liabilities for groups of insurance contracts
These are presented at the portfolio level, disaggregated into:
- Liabilities for remaining coverage
- Liabilities for incurred claims
Reinsurance assets are measured using similar principles, with gains and losses from changes in fulfilment cash flows recognized based on their service components.
Disclosures Under Ind AS 117
Disclosures aim to provide transparency about the effect of insurance contracts on the financial position, performance, and cash flows. They are more extensive than previous standards.
Key disclosures include:
- Reconciliations of opening to closing balances of contract assets and liabilities
- Revenue recognition
- Components of insurance finance income or expenses
- Significant judgements in applying the standard
- Methods used to measure fulfilment cash flows
Entities must disaggregate disclosures by portfolio or group of contracts to provide meaningful information.
Risk Adjustments and Assumptions
Disclosures must also explain how risk adjustments were determined, including:
- Confidence level used (if a technique based on confidence level is used)
- Diversification benefits considered
- The rationale behind the method chosen
Assumptions used in measuring fulfilment cash flows must be disclosed, especially where changes significantly affect the liability valuation.
Transition Requirements and Retrospective Application
Ind AS 117 requires a full retrospective application unless impracticable. If full retrospective application is not feasible, entities can apply either the modified retrospective approach or the fair value approach.
- Under the full retrospective method, past contracts are recalculated as if Ind AS 117 had always been applied
- The modified retrospective method allows simplifications where data is unavailable
- The fair value approach uses the fair value of contracts at the transition date as the starting point
Entities must disclose the transition approach used and explain the reasons behind the choice.
Practical Challenges in Implementation
Implementing Ind AS 117 brings operational, system, and actuarial challenges. These include:
- Updating IT systems to support new measurement and reporting requirements
- Enhancing actuarial models to produce granular data
- Training finance and reporting teams on the new framework
- Aligning audit and internal control processes
Cross-functional coordination is essential to ensure consistent and accurate implementation.
Judgement and Estimation Uncertainty
The use of current estimates and regular reassessment introduces volatility and complexity. Significant judgement areas include:
- Determining discount rates
- Setting risk adjustment levels
- Estimating future cash flows
- Identifying contract boundaries
Disclosure requirements aim to help users understand the degree of uncertainty and sensitivity to changes in these assumptions.
Comparative Information and Restatement
Entities must restate comparative information for one year prior to the date of initial application, unless impracticable. If restatement is not possible, the cumulative effect is adjusted through retained earnings.
Comparative financial statements must be clearly labelled and should explain the nature and effect of the restatement.
Introduction to Presentation and Disclosure Requirements
Ind AS 117 not only establishes principles for recognition and measurement but also places significant emphasis on how insurance contracts should be presented and disclosed in financial statements. Clear and consistent presentation enables users to assess the financial position, performance, and risk exposure of insurers more effectively.
Statement of Financial Position Requirements
An entity must present:
- Groups of insurance contracts that are assets separately from groups that are liabilities.
- Reinsurance contract assets and liabilities distinctly.
The line items are not allowed to be netted off unless specifically permitted, and the unbundling of components must be separately disclosed if applicable.
Separate Presentation for Reinsurance
Ind AS 117 mandates that entities present reinsurance contracts held separately from insurance contracts issued, both in the statement of financial position and in the statement(s) of financial performance. This distinction highlights the different risk profiles and cash flow expectations associated with these contracts.
Statement of Profit and Loss Requirements
The income statement should include:
- Insurance service result, comprising insurance revenue and insurance service expenses.
- Insurance finance income or expenses, presented either in profit or loss or partly in other comprehensive income, depending on the entity’s accounting policy choice.
Insurance Revenue
Insurance revenue represents the amount of expected consideration earned as the entity provides insurance coverage. It reflects:
- Release of the liability for remaining coverage
- Allocation of acquisition costs
- Adjustments for the time value of money
Insurance Service Expenses
These expenses reflect claims incurred, other insurance service costs, and changes in fulfilment cash flows related to past and current services.
Insurance Finance Income or Expenses
The standard provides flexibility in presenting insurance finance income or expenses:
- In profit or loss using a systematic allocation based on the characteristics of the contract
- Alternatively, the effect of changes in discount rates may be presented in other comprehensive income
This choice allows entities to align financial reporting with their performance metrics and internal management.
Disclosure Objectives
Disclosures under Ind AS 117 aim to provide information that:
- Explains the amounts recognized in the financial statements
- Discloses significant judgements made in applying the standard
- Describes the risks arising from insurance contracts
Disaggregation in Disclosures
Entities are required to disaggregate disclosures to allow users to understand the effect of insurance contracts on the financial statements. This involves separating information by:
- Portfolio or group
- Type of contract (life, non-life, reinsurance)
- Measurement models used
Judgement and Estimation Inputs
Key judgements must be disclosed, such as:
- The level of aggregation
- Discount rate assumptions
- Risk adjustment techniques
This transparency ensures that users can assess the robustness of the reported figures and the reliability of measurement techniques.
Disclosure of Changes in Fulfilment Cash Flows
Entities must explain changes in the liability for remaining coverage and the liability for incurred claims, including:
- Expected future claims
- Experience adjustments
- Impact of changes in assumptions
These disclosures help users understand the evolution of insurance liabilities over time and the reasons for changes.
Transition Requirements
Transitioning to Ind AS 117 requires careful planning and execution. The standard offers several approaches to facilitate a smooth transition:
Full Retrospective Approach
This is the preferred method. It requires restating prior periods as if Ind AS 117 had always been applied. This approach provides the most comparable information but may be impractical if historical data is unavailable.
Modified Retrospective Approach
If the full retrospective approach is impractical, the modified approach can be used. It includes specified simplifications such as:
- Estimating cash flows based on available information
- Approximating the contractual service margin
This method requires consistent application across groups of contracts.
Fair Value Approach
When neither retrospective approach is feasible, the fair value approach allows the entity to use the fair value of contracts at the transition date as a proxy for fulfilment cash flows. This method is often simpler but provides less comparability with prior periods.
Transition Disclosures
Regardless of the transition approach used, entities must disclose:
- The method used
- Groups of contracts affected
- The impact on financial statements
- Reconciliations of changes in the contractual service margin and liabilities
These disclosures help users understand how the change in accounting policy impacts the comparability and reliability of the financial information.
Practical Implementation Challenges
Transitioning to and applying Ind AS 117 in practice comes with several challenges:
Data Collection and System Overhaul
Existing IT systems may not support the granular data requirements of Ind AS 117. Significant investment in systems and data management is often necessary.
Training and Change Management
Stakeholders across the organization, from finance teams to actuarial functions and auditors, require extensive training to understand the new concepts and measurement models.
Reassessment of Existing Contracts
Entities must reassess contracts to determine whether they meet the definition of insurance contracts under Ind AS 117 and apply the correct measurement model.
Separation of Components
Identifying embedded derivatives, investment components, and other service elements within contracts can be complex and requires robust judgement and documentation.
Industry-specific Implications
Different segments of the insurance industry face unique challenges under Ind AS 117:
Life Insurance
Life insurers often deal with contracts of long duration and with complex cash flows. Applying the General Measurement Model requires careful estimation of the contractual service margin and frequent remeasurement.
General Insurance
General insurers may benefit from the PAA, which simplifies measurement but still requires careful attention to discounting and acquisition cost treatment.
Reinsurance
Reinsurance arrangements can be both complex and diverse. Ind AS 117 requires separate recognition and presentation, and entities must ensure that ceded and assumed reinsurance contracts are correctly classified.
Interaction with Other Standards
The application of Ind AS 117 must be considered in conjunction with other accounting standards:
Ind AS 109 – Financial Instruments
Investment components not closely related to insurance risk may be separated and measured under Ind AS 109.
Ind AS 115 – Revenue from Contracts with Customers
Contracts without significant insurance risk may fall under the scope of Ind AS 115 rather than Ind AS 117.
Ind AS 1 – Presentation of Financial Statements
Changes in the presentation of line items due to Ind AS 117 should align with Ind AS 1 requirements for clear and understandable financial statements.
Governance and Audit Considerations
Ind AS 117 introduces new control and governance requirements:
Strengthening Internal Controls
Entities must implement controls to ensure data quality, compliance with modelling assumptions, and timely updates of inputs.
Audit Readiness
Auditors will require robust documentation of management’s judgements and assumptions. Independent validation of models and reconciliations will be critical.
Early Adopters and Global Trends
Several global insurers who adopted IFRS 17 (the international equivalent of Ind AS 117) early have shared key insights:
- The importance of integrated project teams combining finance, actuarial, and IT expertise
- The need for phased implementation
- Benefits of improved understanding of profitability by product line
These experiences are highly relevant for Indian insurers transitioning to Ind AS 117.
Opportunities Arising from Ind AS 117
Beyond compliance, Ind AS 117 presents strategic opportunities:
Enhanced Transparency
Investors and analysts will gain deeper insights into the profitability and risk exposure of insurance companies.
Improved Product Design
The standard enables insurers to design more efficient and transparent insurance products by focusing on long-term service profitability.
Better Decision-Making
With granular insights into cash flows and margins, insurers can enhance pricing strategies, reinsurance arrangements, and capital allocation.
Conclusion
Ind AS 117 marks a significant shift in the way insurance contracts are recognized, measured, presented, and disclosed in financial statements. Its objective is to ensure that entities provide relevant and reliable information that truly reflects the financial impact of insurance contracts. This comprehensive standard introduces consistency in accounting practices across various types of insurance businesses and aligns Indian financial reporting with global standards.
The standard emphasizes transparency by mandating entities to disclose detailed insights into the assumptions, estimates, risks, and financial results tied to insurance contracts. With the introduction of models like the General Measurement Model, the Premium Allocation Approach, and the Variable Fee Approach, insurers are encouraged to reassess their data collection methods, internal controls, and actuarial support systems. The requirement to separate investment and service components and to recognize revenue over time helps users of financial statements better understand the insurer’s profitability and risk exposure.
Transitioning to Ind AS 117 may present practical challenges for insurers, particularly in terms of system upgrades, staff training, and re-evaluation of legacy contracts. However, the long-term benefits, such as improved investor confidence, better comparability across jurisdictions, and enhanced financial disclosures, make it a vital step forward for the industry.
Ultimately, Ind AS 117 is more than just a compliance requirement; it is a framework that encourages greater clarity, accountability, and comparability. As insurers fully adopt and implement the standard, stakeholders across the financial ecosystem, including investors, analysts, and regulators, will benefit from more meaningful and comprehensive financial information.