msg life ag - Logo

IFRS 17 – new accounting rules for the insurance industry

On 19 November 2021, the European Commission passed Regulation (EU) 2021/2036. This means that IFRS 17, the new international accounting standard for insurance contracts, is now European law.

The complex set of regulations IFRS 17 will enter into force on 1 January 2023 and replace the existing interim IFRS 4 which has been in effect since 2005. The new standard regulates the principles with regard to the identification, method, valuation, reporting and the disclosures for insurance contracts.

A time-consuming process

After 20 years of project work, the time had come: on 18 May 2017, the International Accounting Standard Board (IASB) published IFRS 17, the new international accounting standard for insurance contracts. This marked the first time there had been a globally uniform basis for the accounting of insurance contracts.

However, this was not enough. As has been standard practice with other newly developed IFRSs, a transition resource group – a public forum for representatives of the insurance industry – was formed in order to discuss unanswered questions concerning the implementation of IFRS 17. In light of the concerns of the transition resource group and the resulting proposed changes, the IASB had the date of introduction postponed in order to give the businesses more time. Based on the transition resource group’s proposals, the IASB released the ‘Amendments to IFRS 17’ on 25 June 2020. This postponed the planned date of introduction to 1 January 2023.

The next step was for the new standard to be implemented into EU law (this is referred to as endorsement). To this end, the EU Commission asked the European Financial Reporting Advisory Group (EFRAG) submitted an endorsement recommendation on 21 March 2021 after consulting with the stakeholders. The vote for endorsement by the Accounting Regulatory Committee (ARC) followed on 16 July 2021. The European Commission followed EFRAG’s endorsement recommendation including a temporary derogation for the formation of annual cohorts.

Time to act

Companies that are required to or want to report as well as create quarterly financial reports in accordance with the International Financial Reporting Standards (IFRS) need an opening balance sheet as early as 1 January 2022.  Most likely, policies taken out before this date will also be at least partially treated as though they had been accounted for pursuant to IFRS 17 from the beginning.

All insurers for whom IFRS is an issue should prepare themselves actively and take on the topic of implementation in their policy administration systems soon. The implementation of IFRS 17 has a considerable impact on the IT architectures of insurers. While the previous IFRS 4 largely allowed for the retention of previous accounting practices – other than some individual special features – IFRS 17 poses new, far-reaching requirements. This will make the systems in which insurers reproduce regulatory requirements much more complex.

Despite certain similarities with the Solvency II regulations, IFRS 17 poses even greater challenges for businesses in terms of interpreting the standard, changing processes and the work required to implement it. For example, Andreas Brandstetter, CEO of the Uniqa Insurance Group, stated in his presentation of the preliminary figures for 2018 that the company would have to spend between 50 and 60 million euros to transition to IFRS 17. This amount is twice as much as the costs incurred as part of the implementation of Solvency II at the time. According to Brandstetter, there will then no longer be known factors such as premiums, losses and benefits.

New valuation model

One of the key changes of IFRS 17 is the introduction of a new valuation model. To evaluate an individual policy, you first need a so-called fulfilment value, which is determined with a building block approach on the basis of the cash flows of the individual policy. In addition to the determination of the cash flows and the time value of money (discounting), a risk-related adjustment (risk adjustment) for the non-financial risk must be carried out.

Additionally, the fourth element is the so-called contractual service margin (CSM). The CSM is not determined for individual policies, but for groups of policies. For this purpose, a two-stage collective formation is to be carried out, i.e. classification. The individual policies in the policy administration system are to be designated accordingly. Once used, this portfolio/group formation of the contracts can no longer be changed. The policy groups should be introduced at an early stage, as subsequent additions to the portfolios become more complex with increasing history.

The variable-fee approach (VFA) also introduced special regulations for policies with direct participation in surplus that account for the special features typical for the German Life segment. This is intended to ensure that these policies do not give rise to any undue fluctuations in earnings.

In addition to this, the new standard makes sure that the insurance and investment components of an insurance contract are separate. The investment component is the amounts that the insurance company has to pay back to the customer ‘by all means’, regardless of whether an insured event has occurred or not. In accordance with IFRS 17, this investment component has to be separate from the insurance component in the income statement and disclosure and have to be deducted from benefits payments as a result.

Optional temporary derogation for companies from the EU

The portfolio/group formation of the standard presented by the IASB sees the mandatory provision for annual cohorts to be formed. There had already been intensive discussions in the transition resource group (TRG) and then in the EFRAG whether the formation of annual cohorts is appropriate when using the variable fee approach (VFA), because it largely ignores balancing in the collective and creates unnecessary complexity.

In line with the EFRAG’s recommendation, this open point was the only one not to be directly adopted into EU law. Article 2, paragraph 2 of Regulation (EU) 2021/2036 offers an optional derogation where companies may decide whether or not they want to form annual cohorts for e.g. life insurance contracts with direct participation in surplus that are common in Germany. According to Article 3, this optional derogation is initially limited until 31 December 2027. A review of this exemption by the EU Commission is to be carried out in due time, also taking into account the results of the planned review of IFRS 17 by the IASB.

Implementation of IFRS 17 requirements with solutions from msg life

To be able to implement the new accounting requirements, existing IT landscapes have to be adapted, new functions integrated and systems expanded. Experts talk about a ‘mammoth project’ for insurers. With our policy administration system for the Life segment, msg.Life Factory, we offer a flexible and powerful platform that replicates all of the necessary requirements. msg.Life Factory enables the highly efficient handling of all business processes by using the relevant historical information. To support IFRS 17, the portfolio/group formation of the contracts and the investment components are shown here.

msg.Life Factory

The standard software msg.Ilis offers the ideal platform for the provision of cash flows of individual policies and therefore the basis for all other policy-related calculations. The additional component msg.Ilis offers centralised data storage where all data necessary for forecast calculations, evaluations and risk assessments are managed. The solution enables the audit-proof storage of data as well as the reproducibility of the calculations.


Like msg.Life Factory, msg.Ilis is also integrated in the complete solution msg.Insurance Suite.

msg.Insurance Suite

Table of contents


let us know.

We are happy to help!

Contact form