Assurance Gazette – September 2024 Edition

We are thrilled to present the September 2024 edition of the Assurance Gazette. This edition
delve into a significant development in Indian accounting standard for Insurance Contracts.
We hope this edition provides valuable insights and helps you navigate the complexities of
Ind AS 117. While its applicability for Indian insurers annual financial statements is currently
pending IRDAI notification, understanding this new standard is essential for all professionals
in the field. This foresight will enable a smooth transition when Ind AS 117 eventually comes
into effect. In this edition of the Gazette, we would like to highlight the proposed illustrations
included in the Exposure Draft of IFRS on Climate-related and Other Uncertainties in
Financial Statements. This aims to enhance materiality judgments and disclosures, thereby
improving the clarity and relevance of financial reporting on such uncertainties.
Decoding Ind AS 117: What It Means for the Indian Insurance Industry
The Ministry of Corporate Affairs has issued the Companies (Indian Accounting Standards)
Amendment Rules, 2024, introducing Ind AS 117, Insurance Contracts. This new standard
will replace Ind AS 104 and is effective for annual reporting periods beginning on or after
April 1, 2024. This standard applies to insurance contracts (including reinsurance contracts)
reinsurance contracts held by insurance companies and investment contracts with
discretionary participation features it issues, provided the entity also issues insurance
contracts.
Key Features and Impact of Ind AS 117
1. New Measurement Models
Ind AS 117 introduces three measurement models for insurance contracts:
a. General Model (Building Block Approach): This is the default model for
measuring insurance contracts. It requires entities to measure a group of
insurance contracts as:
• Fulfilment cash flows (probability-weighted estimate of future cash flows, adjusted
for time value of money and financial risks)
• Contractual Service Margin (unearned profit)
2. Understanding Contractual Service Margin (CSM):
• Definition: CSM represents the unearned profit embedded in a group of insurance
contracts. It’s the profit that an insurer expects to earn over the remaining coverage
period as it fulfils its obligations under those contracts.
• Initial Recognition: CSM is initially recognized in a way that avoids immediate profit
or loss recognition upon issuing the contracts. It is calculated as the difference
between the present value of future cash inflows and outflows associated with the
contract group, minus any recognized insurance acquisition cash flows.
• Subsequent Measurement: CSM is gradually released into profit or loss over the
coverage period as the insurer provides services to its policyholders. This release is
known as insurance revenue.
b. Premium Allocation Approach: A simplified model for contracts with coverage
periods of one year or less or where the measurement is not expected to differ
materially from the General Model.
c. Variable Fee Approach: For contracts with direct participation features, where the
entity’s obligation to policyholders is based on the fair value of underlying items.

3. Changes in Revenue Recognition with Ind AS 117
• Focus on Service Provision: Ind AS 117 shifts the focus from premium recognition
to revenue recognition based on the actual provision of services over time. This is a
significant departure from previous practices that often-recognized revenue upfront
upon receiving premiums.
• Amortization of CSM: Instead of recognizing the entire premium as revenue upfront,
Ind AS 117 mandates the amortization of CSM over the coverage period. This
amortization pattern reflects the gradual fulfilment of the insurer’s obligations and the
proportionate earning of profit.
• Variable Consideration: The standard addresses variable consideration, which is
common in insurance contracts. The CSM is adjusted to reflect changes in the
estimates of future cash flows, including changes arising from experience
adjustments, changes in assumptions, and the effect of risk mitigation.
• Onerous Contracts: When a contract group becomes onerous (meaning the
expected costs exceed the expected benefits), immediate loss recognition is
required, and the CSM is reduced to zero. Thus, this would require regular
assessments to identify whether groups of contracts are onerous, and actuaries need
to develop models to perform these tests efficiently and frequently.
• Disclosure Requirements: Ind AS 117 introduces detailed disclosure requirements
to provide transparency on the amount and timing of revenue recognition. Entities
need to disclose information about their CSM, how it’s calculated, and how it’s being
amortized.