IFRS 17 addresses the limitations of IFRS 4 by introducing a new approach to accounting for insurance contracts that is based on the principles of the economic substance of the contract rather than its legal form. This new approach is intended to provide more relevant and reliable information to financial statement users by better reflecting the economics of the contract and the risks inherent in it.
To overcome the sensitivity of profits to reserving assumptions, IFRS 17 requires companies to use a consistent, principles-based approach to determining the amount of the contractual service margin (CSM) for each insurance contract. The CSM represents the difference between the premiums collected and the estimated future cash flows to be paid under the contract, and is intended to reflect the profits expected from the contract over its term. By using a consistent approach to determining the CSM, companies can provide more reliable information about the expected profitability of their insurance contracts.
To overcome the lack of comparability of different life insurance companies, IFRS 17 requires companies to use a consistent approach to measuring and presenting the CSM for each insurance contract. This includes specifying how the CSM should be measured, how it should be allocated to periods of coverage, and how it should be presented in the financial statements. By using a consistent approach to measuring and presenting the CSM, companies can provide financial statement users with more comparable information about the profitability of their insurance contracts.