Income Statement – Life Example (GMA)
The Income Statement or “Statement of Financial Performance” under IFRS 17 is a drastic divergence from IFRS 4. This course will teach you about the new sections and what is contained in each of the new Income Statement sections.
IFRS 17 Income Statement
- Fundamental change to the income statement under IFRS 17 vs. IFRS 4
- Very different view and presentation
- Different concept of “Revenue” and “Expenses”
- Splits Income Statement into Sections:
- Insurance Service Result
- Investment Result
- Other Result / Income Taxes
Illusrative Example Assumptions
First we will make some simplifying assumptions for our Example:
- All business is non-participating, long-term life insurance contracts
- All contracts are subject to the General Measurement Approach (GMA)
- All groups of contracts are profitable currently and have positive CSM balances
- No Other Comprehensive Income (OCI)
The following visual illustrates the income statement for our sample life insurer:
Income Statement IFRS 17
| Income Statement | |
| Insurance Service Result | |
| Insurance Revenue | 1,745,000 |
| Insurance Service Expense | (1,420,000) |
| Net Reinsurance Expense | (160,000) |
| Insurance Service Result | 165,000 |
| Investment Result | |
| Net Investment Income | 875,000 |
| Net Finance Expense | (665,000) |
| Net Investment Result | 210,000 |
| Other Result | |
| Other Revenue | 250,000 |
| Other Expenses | (375,000) |
| Other Result | (125,000) |
| Income Tax | (70,000) |
| Net Income (Loss) | 320,000 |
Insurance Service Result
| Income Statement | |
| Insurance Service Result | |
| Insurance Revenue | |
| CSM Recognized for Services Provided | 150,000 |
| Risk Adjustment Released in the Period | 175,000 |
| Expected Claims | 1,000,000 |
| Expected Expenses | 300,000 |
| Recovery of Insurance Acquisition Expenses | 120,000 |
| Total Insurance Revenue | 1,745,000 |
| Insurance Service Expenses | |
| Actual Claims | (950,000) |
| Actual Expenses | (295,000) |
| Amortization of Insurance Acquisition Expenses | (120,000) |
| Changes in Estimates in LIC Fulfilment Cash Flows | 25,000 |
| Experience Adjustments on the LIC | (80,000) |
| Total Insurance Service Expenses | (1,420,000) |
| Insurance Service Result (before Reinsurance) | 325,000 |
The table above illustrates the Insurance Service Result, before reinsurance is considered.
The Insurnace Revenue consists of several items, as follows:
CSM Recognized for Services Provided: this represents the profit that is earned in the period for the products in force during the period. The CSM is established for a group at inception and represents the unearned profit for that group of contracts. This unearned profit is then “earned” over time through this line on the income statement.
Risk Adjustment Released in the Period: this represents the risk adjustments that were held for the period and that are now no longer needed.
Expected Claims: based on actuarial assumptions for the period. These represent the actuary’s estimate of the claims for the period.
Actual Claims = New Claims Paid + New IBNR Setup + New Claims Payable = (700,000) + (100,000) + (150,000) = (950,000)
Experience Adjustment on LIC = Release of IBNR + Paid IBNR = 100,000 + (180,000) = (80,000) this line compares our expected IBNR to the actual IBNR claims that occured. In this example, we expected $100,000 of IBNR claims, but we actually observed $180,000 of IBNR claims.
Expected Attributable Expenses: based on expected assumptions
Actual Attributable Expenses: based on actual accounting entries. These represent the actual attributable expenses from the accounting system, after applying the appropriate cost allocation formulas, to allocate expenses between attributable and non-attributable expenses.
Recovery of Insurance Acquisition Expenses and Amortization of Insurance Acquisition Expenses offset each other. Represents the Insurance Acquisition Expenses that are “earned” in the period. These do not impact P&L and offset. Actual vs. Expected Acquisition Expenses impact the CSM roll-forward instead.
Changes in Estimates in LIC Fulfilment Cash Flows: this represents the changes in assumptions affecting the LIC in the period
Net Expense From Reinsurance
| Income Statement (Continued) | |
| Allocation of Reinsurance Paid | |
| CSM Recognized for Services Provided | (75,000) |
| Risk Adjustment Released in the Period | (87,500) |
| Expected Recoveries of Claims | (500,000) |
| Total | (662,500) |
| Amounts Recovered from Reinsurance | |
| Actual Claims | 475,000 |
| Changes in Estimates in LIC Fulfilment Cash Flows | (12,500) |
| Experience Adjustments on the LIC | 40,000 |
| Total | 502,500 |
| Net Expense from Reinsurance | (160,000) |
First we have the CSM recognized for services provided in the period. This would represent the unearned profits of the reinsurer. When we sell a group of contracts, it generates an initial CSM. When this group is also reinsured, it will generate a Gross CSM as well as a Ceded CSM. This line represents the amortization of that unearned Ceded CSM.
Next is the ceded risk adjustment released in the period. Our reinsurance asset also contains a risk adjustment. This risk adjustment is then unwound over time and released into income.
Expected Reinsurance Claims: this represents the expected reinsurance claims reimbursed in the period
Actual Reinsurance Claims: this represents the actual reinsurance claims reimbursed in the period
Changes in Estimates in LIC Fulfilment Cash Flows: this represents the changes in assumptions affecting the LIC in the period. For example, suppose that mortality assumptions were updated in the period, which then required a change to our LIC IBNR.
Experience Adjustment on LIC = Release of IBNR + Paid IBNR = (50,000) + 90,000 = 40,000 this represents the expected reinsured IBNR for the period compared to our actual reinsured IBNR claims received in the period.
Insurance Service Result
| Income Statement | |
| Insurance Service Result | |
| Insurance Revenue | 1,745,000 |
| Insurance Service Expense | (1,420,000) |
| Insurance Service Result (before Reinsurance) | 325,000 |
| Net Reinsurance Expense | (160,000) |
| Insurance Service Result | 165,000 |
Investment Result
Actual Investment Income:
- Interest income, coupon/dividend income
- Change in market value of actual assets
Finance Income or Expense
- Expected interest accretion on the BEL, RA and CSM
- Change in Liabilities (BEL & RA) due to changes in IFRS 17 yield curve during the period
| Income Statement (Continued) | |
| Actual Investment Return | |
| Interest Earned | 15,000 |
| Coupon Income Earned | 125,000 |
| Dividends Received | 20,000 |
| Changes in Market Value in the Period | 715,000 |
| Total | 875,000 |
The following table illustrates the Insurance Finance Income or Expense. The first section shows the result on a Gross basis and the second section shows the ceded result. The net results can then be compared to our Actual Investment Return, to determine if we made money on our investments during the period, relative to our expected returns and changes in liabilities due to the change in the IFRS 17 yield curve.
| Income Statement (Continued) | |
| Actual Investment Return | 875,000 |
| Insurance Finance Income or Expense from Insurance Contracts | |
| Interest Accreted on the Best Estimate Liability | (235,000) |
| Interest Accreted on the Risk Adjustment | (25,000) |
| Interest Accreted on the CSM | (20,000) |
| Changes in Discount Rates in the Period | (1,050,000) |
| Total | (1,330,000) |
| Insurance Finance Income or Expense from Reinsurance Contracts | |
| Interest Accreted on the Best Estimate Liability | 117,500 |
| Interest Accreted on the Risk Adjustment | 12,500 |
| Interest Accreted on the CSM | 10,000 |
| Changes in Discount Rates in the Period | 525,000 |
| Total | 665,000 |
| Net Investment Result | 210,000 |
We can also look at the Investment Result under a different lense. The following table compares the Actual interest, coupon and dividend income to the interest accreted on the BEL, RA and CSM. An insurer would structure its actual investments, with the goal of exceeding the returns that are used to discount the liabilities. In this case, the insurer was able to generate $160,000 of income relative to expected interest accretion of $140,000. Or in other words, the expected return of our BEL, RA and CSM was $140,000 over the period, relative to the actual return of $160,000. So we generated $20,000 of profit in the period.
The next section compares the actual changes in the market value of our assets in the period, to the change in the BEL and RA in the period due to changes in the IFRS 17 yield curve. If an effective Asset-Liability Management strategy is employed, we would expect these two values to be close to each other. With that being said, Insurers have assets in their Surplus account that also change in market value, with no corresponding offset on the liabilities. In this example, the insurer was well matched, however, we have assumed the surplus assets generated additional gains, resulting in a $190,000 gain in the period.
| Income Statement (Continued) | |
| Actual Interest/Coupon/Dividends | 160,000 |
| Interest Accreted on BEL + RA + CSM (Net) | (140,000) |
| Net Result | 20,000 |
| Changes in Market Value in the Period | 715,000 |
| Changes in Discount Rates in the Period (Net) | (525,000) |
| Net Result | 190,000 |
| Net Investment Result | 210,000 |
The following summarizes the results. We have actual investment income of $875,000 compared to net Finance Expense of $665,000. Thus generating an investment result of $210,000.
| Income Statement (Continued) | |
| Actual Investment Return | 875,000 |
| Insurance Finance Income or Expense (Net) | (665,000) |
| Net Investment Result | 210,000 |
Other Result and Income Taxes
Other Result:
- Other Income (service fee income, etc.)
- Other Expenses (non-attributable expenses)
Income Taxes
- Income Taxes (current / deferred)
| Income Statement (Continued) | |
| Other Result | |
| Other Revenue | 250,000 |
| Other Expenses | (375,000) |
| Other Result | (125,000) |
| Income Tax | (70,000) |
Income Statement IFRS 17
| Income Statement | |
| Insurance Service Result | |
| Insurance Revenue | 1,745,000 |
| Insurance Service Expense | (1,420,000) |
| Net Reinsurance Expense | (160,000) |
| Insurance Service Result | 165,000 |
| Investment Result | |
| Net Investment Income | 875,000 |
| Net Finance Expense | (665,000) |
| Net Investment Result | 210,000 |
| Other Result | |
| Other Revenue | 250,000 |
| Other Expenses | (375,000) |
| Other Result | (125,000) |
| Income Tax | (70,000) |
| Net Income (Loss) | 320,000 |
The income statement details the insurance service result – what was earned on the insurance side of the business, the net investment result – what was earned on the investment side of the business, and the other result. For an insurer to generate a positive bottom line, the sum of the insurance service result and net investment result must exceed the Other Result. Some insurers will have minimal or even no other revenue. So it is imperative to ensure that the insurance service result and net investment result exceed the Other Expenses, or non-attributable expenses. If they do not, then there will be a loss and surplus will decrease in the period.