COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING ANDFINANCE

Group Assignment (Weekend Program)

Course-
Course Code-

NAME .……………………………………………..ID. NO.

1. ………………………………….AcFnW/

2. ………………………….......AcFnW/

3. ............................AcFnW/

4. ………………..……..….AcFnW/

5. ……………………………AcFnE/

Summation date: 10/01/2026 G.C

Hawassa, Ethiopia
1. Introduction
IFRS 17 introduced a single, consistent accounting framework for insurance contracts,
replacing IFRS 4. The standard improves transparency and comparability by introducing
new measurement models and performance indicators. This assignment explains the
General Measurement Model (GMM), compares it with the Premium Allocation Approach
(PAA) and the Variable Fee Approach (VFA), provides a numerical illustration, and
evaluates the impact on financial statements, key performance indicators (KPIs), and
business operations.

2. The Core Model: General Measurement Model (GMM) / Building Block

Approach (BBA)
The General Measurement Model is the default measurement approach under IFRS 17. It
measures insurance contract liabilities using three building blocks that together represent
the current value of the insurer’s obligation to provide insurance services.

2.1 Fulfilment Cash Flows (Present Value of Future Cash Flows)

Fulfilment cash flows represent the present value of all expected future cash inflows and
outflows that arise as the insurer fulfils the insurance contract. They include expected
premiums, claims, benefits, acquisition costs, and maintenance expenses. These cash flows
are discounted using current, market-consistent discount rates to reflect the time value of
money and financial risks.

2.2 Risk Adjustment for Non-Financial Risk

The risk adjustment represents the compensation that the insurer requires for bearing the
uncertainty about the amount and timing of cash flows that arise from non-financial risks.
These risks include mortality, morbidity, lapse, expense variability, and operational risk.
The risk adjustment reflects the insurer’s risk appetite and makes explicit the degree of
prudence in measuring insurance liabilities.

2.3 Contractual Service Margin (CSM)

The Contractual Service Margin represents the unearned profit in insurance contracts. IFRS
17 prohibits the recognition of profit at inception. Therefore, if the expected fulfilment cash
flows and risk adjustment indicate a gain, that gain is deferred in the CSM. The CSM is
released systematically to profit or loss over the coverage period as insurance services are
provided.
3. Comparison of Measurement Models under IFRS 17

3.1 General Measurement Model (GMM)

The GMM is the default model applied to all insurance contracts unless specific criteria are
met for using another model. It is mainly used for long-term and complex contracts such as
life insurance and health insurance. The model focuses on updated assumptions, current
discount rates, and explicit profit recognition through the CSM.

3.2 Premium Allocation Approach (PAA)

The Premium Allocation Approach is a simplified version of the GMM. It may be applied
when the coverage period of the contract is one year or less, or when it produces results
that are not materially different from the GMM. The PAA is commonly used for short-
duration contracts such as motor, property, and travel insurance. It is similar to the
unearned premium reserve model under previous standards.

3.3 Variable Fee Approach (VFA)

The Variable Fee Approach applies to contracts with direct participation features. In these
contracts, policyholders share in the returns of underlying investment items, and the
insurer earns a variable fee for managing those investments. The VFA modifies the GMM by
adjusting the CSM for changes in the insurer’s share of the fair value of underlying items. It
is mainly used for unit-linked and with-profit life insurance products.

4. Simplified Numerical Illustration Using the GMM

Assume an insurance company issues a three-year insurance contract with the following
assumptions at inception:

• Premium received at inception: 1,200 Birr

• Expected claims and expenses: 1,000 Birr

• Risk adjustment for non-financial risk: 50 Birr

Expected profit at inception is therefore 200 Birr. Under IFRS 17, this profit is not
recognized immediately. Instead, it is deferred in the Contractual Service Margin (CSM).

4.1 Initial Recognition

At initial recognition, the insurance contract liability is measured as the sum of fulfilment
cash flows and the risk adjustment, less the CSM. Since the expected profit is 200 Birr, the
CSM is set at 200 Birr.

Fulfilment cash flows (net) = Expected inflows – Expected outflows = 1,200 – 1,000 = 200
Birr (gain)
Risk adjustment = 50 Birr
CSM = 200 Birr
Net insurance contract liability reflects the obligation to provide future service.

4.2 Subsequent Measurement – End of Year 1

The CSM is released over the coverage period in line with the provision of insurance
services. Assuming services are provided evenly, the CSM is released equally over three
years.

Annual CSM release = 200 ÷ 3 = 66.67 Birr

In Year 1, the insurer recognizes 66.67 Birr as insurance service revenue in the Statement of
Profit or Loss. The remaining CSM at the end of Year 1 is 133.33 Birr.

4.3 Subsequent Measurement – End of Year 2

In Year 2, another 66.67 Birr of CSM is released to profit or loss. The remaining CSM balance
at the end of Year 2 is 66.66 Birr.

5. Impact on Financial Statements

5.1 Statement of Financial Position

Under IFRS 17, insurance liabilities are measured more transparently. The separate
presentation of fulfilment cash flows, risk adjustment, and CSM improves users’
understanding of future obligations and profits. The CSM balance represents future
unearned profit and becomes a key indicator of the insurer’s financial strength.

5.2 Statement of Profit or Loss

Profit is no longer recognized at the start of the contract. Instead, profit emerges gradually
through the release of the CSM. This leads to smoother and more stable earnings patterns
compared to previous standards.

6. Impact on Key Performance Indicators (KPIs)

IFRS 17 changes the way performance is measured. Traditional KPIs such as return on
equity and underwriting margin are affected by the timing of profit recognition. New KPIs
become important, including the CSM balance, CSM release rate, new business margin, and
insurance service result.

7. Business and Operational Implications

The implementation of IFRS 17 has significant operational implications. Insurers must
integrate actuarial and finance systems, enhance data quality, and update processes for
assumption setting and model governance. Although the implementation cost is high, the
long-term benefits include better risk management, improved strategic decision-making,
and stronger confidence from investors and regulators.

In the Ethiopian insurance market, IFRS 17 encourages companies to focus more on long-
term value creation rather than short-term profit. This supports sustainable growth and
better financial discipline in the sector.

8. Conclusion
The General Measurement Model under IFRS 17 represents a fundamental shift in insurance
accounting. By clearly separating cash flows, risk, and profit, the standard improves
transparency and comparability. The use of alternative models such as the PAA and VFA
ensures flexibility while maintaining consistency. Overall, IFRS 17 strengthens financial
reporting quality and supports more informed economic decisions.