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      (This article was published on 30 March 2020 and updated on 29 October 2025)

      What’s the issue?

      External events may trigger economic uncertainty, and may have pervasive impacts for both insurance companies and their policyholders.

       

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      Joachim Kölschbach
      Joachim Kölschbach

      Global IFRS Insurance Contracts Leader

      KPMG en España

       

      These events and conditions can impact both non-life and life-and-health insurers. They may impact insurers’ balance sheets and capital ratios significantly. For example:

      • volatile markets affect investment portfolio valuations and bond yields;
      • surging credit-default-swap indices raise concerns about increased defaults; and
      • changing interest rates and other macroeconomic developments may increase claim costs and change policyholder behaviour.

      These impacts may be both direct (e.g. higher car repair or medication costs) and indirect (e.g. recessionary pressures or currency impacts). They could affect how an insurer:

      • measures fulfilment cash flows, including adjusting for non-financial risk; and
      • assesses the recoverability of assets for insurance acquisition cash flows (IACF).

      The impact on insurance contract liabilities and assets will depend on the specific types of coverage provided, and the accounting policies and significant judgements applied under IFRS 17 Insurance Contracts. IFRS 17 requires estimates of future cash flows to be updated for current expectations using unbiased, probability-weighted expected values. Insurers need to assess the impact of external events on insurance contract liabilities1. They also need to assess any knock-on effects for assumptions about reinsurance recoveries and contract renewals, and the disclosure implications.

      In times of uncertainty, insurers face a double squeeze: rising costs from more expensive claims and administration;, and balance sheet pressures from falling asset values, growing liabilities and shifts in policyholder behaviour.

      Impacts on accounting for insurance contracts under IFRS 17

      IFRS 17 applies to insurance and reinsurance contracts issued, reinsurance contracts held and, sometimes, investment contracts with discretionary participation features2, 3. Under IFRS 17, the insurance contract liability includes fulfilment cash flows that represent the risk-adjusted present value of insurers’ rights and obligations to policyholders, comprising:

      • estimates of expected (i.e. probability-weighted) cash flows;
      • adjustments for the time value of money (i.e. discounting) and other financial risks; and
      • a risk adjustment for non-financial risk.

      Estimates of expected cash flows are ‘explicit’. This means that the adjustment for non-financial risk is estimated separately. The adjustments for the time value of money and financial risk are also estimated separately from the cash flow estimates, unless the most appropriate measurement technique combines those estimates. [IFRS 17 32, 33(d)]

      Insurance contract liabilities are subsequently remeasured to reflect current estimates. This means that insurers need to review and update their previous estimates at the reporting date so that:

      • the updated estimates faithfully represent the conditions that exist at that date; and
      • the changes in estimates faithfully represent the changes in conditions during that period. [IFRS 17.33(c), B54–B55]

      Insurers need to consider their current expectations of future events that might affect the expected cash flows, except for future changes in legislation that would change the company’s obligations. Such changes in legislation are reflected in measuring the expected cash flows only when they are substantively enacted. [IFRS 17.B60, BC156]

      Insurers also need to consider the extent to which current circumstances require them to reassess market and non-market variable assumptions that impact insurance contract measurement. Market variables generally give rise to financial risk, whereas non-market variables generally give rise to non-financial risk. Consequently, insurers may need to update their estimates of expected cash flows, their financial risk assumptions and/or the risk adjustment for non-financial risk. [IFRS 17.B43]

      Getting into more detail

      Insurers estimate the expected cash flows (including unbiased estimates of catastrophic losses) under existing contracts. The expected cash flows exclude claims under possible future contracts. However, insurers’ expectations about possible future contracts may impact recognised IACF assets related to future contracts or expected renewals. For example, in response to heightened climate-related risks some insurers might choose not to renew contracts in high-risk areas, which may mean that related IACF assets are not recoverable. [IFRS 17.B40]

      When assessing the impact on insurance contract liabilities, insurers need to consider the coverage provided under the terms and conditions of issued insurance contracts. Meanwhile, when determining their obligations under insurance contracts, insurers need to evaluate the precise extent of coverage and the impact of exclusions and limitations on coverage. This includes assessing any new directives, laws and regulations that have been substantively enacted and may require insurers to provide coverage or pay claims for insured events in addition to those required by the pre-existing terms and conditions of the insurance contract. Therefore, insurers may need to update their estimates of expected cash flows to reflect changes in coverage provided under insurance contracts.

      Under IFRS 17, inflation assumptions based on a price or rate index, or inflation-linked asset returns, are considered financial risks. In contrast, expectations about specific price changes are non-financial risks. When cash flows are not contractually tied to an index but are influenced by general inflation, insurers need to apply judgement to determine whether changes in price levels represent a financial or non-financial risk. If an insurer considers that it uses an index of prices or rates merely as a proxy or tool for estimating price changes, then revised assumptions about those price changes would not be a financial risk. [IFRS 17.B128(a)–(b), Insights 8.1.440.12–14]

      If expected cash flows are sensitive to inflation, then insurers use current estimates of possible future inflation rates when determining the fulfilment cash flows. They develop the expected value of the full range of possible outcomes, including:

      • short-term, medium-term and prolonged inflation impacts;
      • differing levels of price elasticity and claims inflation; and
      • the effects of currency depreciation or appreciation on the costs of imported replacement materials used in fulfilling claims.

      In uncertain times, the range of possible outcomes may widen significantly. IFRS 17 requires that these are objective, current and unbiased. [IFRS 17.B37–B60]

      The risk adjustment for non-financial risk reflects the amount an insurer charges for bearing the uncertainty over the amount and timing of cash flows arising from non-financial risk (e.g. lapse and expense risk). Management applies judgement when determining this adjustment. Increasing uncertainty could affect management’s estimates and trigger a higher risk adjustment. [IFRS 17.37, B87, B91]

      Additionally, insurers need to consider longer-term effects that are not financial risks – e.g. increased lapse volatility and changes in expense assumptions. Uncertainty related to these effects can drive changes in the risk adjustment.

      Insurers need to assess whether they would require higher compensation both for non-financial risks with a wider probability distribution and for those cases where less is known about the current estimate and its trend. They also need to reassess the risk adjustment to capture added uncertainty. [IFRS 17.119, B91]

      Insurance revenue depicts the provision of services, reflecting the consideration insurers expect to receive in exchange.

      Insurers need to consider the impact of changes in the coverage provided under an insurance contract when determining the amount of the contractual service margin recognised in profit or loss because of the transfer of insurance contract services during the period. For insurance contracts measured under the premium allocation approach, an insurer would need to consider if the expected pattern of the release of risk during the coverage period differs significantly from the passage of time. The expected pattern may be impacted by updated expectations of claims payment patterns and lapses. These considerations may impact the insurance revenue recognised in the period as a result. [IFRS 17.B119, B126]

      In times of economic uncertainty, insurers need to evaluate the risk of contracts becoming onerous due to unpriced claims inflation, especially when premiums are fixed or regulated. When premium increases are insufficient to offset increases in expected claims and other expenses, this may lead to the recognition of onerous contract losses. Prolonged or high-impact scenarios may also trigger impairment testing of related IACF assets. [IFRS 17.28E, 47, 48, B35D]

      Impact across insurance types

      Economic uncertainty could impact an insurance business in different ways and cause policyholder behaviour to change. For example, uncertainties may affect surrender probabilities and insurance fraud, as well as the recoverability of assets for IACF. Measures taken by governments and regulators (e.g. specific assistance or sanctions) may limit or promote sales activity and could impact cash inflows from premiums.

      In addition, insurers and reinsurers may have provided coverage for business disruption or cyber security events. Assessing whether particular events and related losses are covered will require legal analysis. Insurers and reinsurers need to update their estimates and may need to provide disclosures about the uncertainty around claims arising from specific events.

      In non-life or general insurance, an external event may affect the following types of insurers.

      • Car insurers could see rising claims costs due to higher prices for imported car parts.
      • Property insurers may be impacted by construction cost inflation affecting settlement costs.
      • Trade credit insurers may face increased claims as businesses default on payments due to disrupted supply chains or economic instability.
      • Workers' compensation insurers could see more claims from workers alleging inadequate protection during disruptive events.
      • Business interruption insurers may experience a surge in claims from businesses forced to cease operations due to an external event.
      • Travel insurers might face rising claims if workforce shortages or business disruptions result in cancelled travel plans or unfulfilled services.

      Some non-life insurers may cease insuring certain risks due to it no longer being economically viable or becoming too risky, or because of public pressure.

      Lastly, war-related risks have been excluded from many insurance contracts since 1938. Therefore, many policies will not cover losses related to armed conflict.

      Life insurers may face longer-term impacts. A downturn in financial markets and increases in credit risk could lead to impairment of financial assets. Economic recessions may impact policyholders’ investment and savings priorities and cause accelerated policy lapse. An increasing interest rate environment could also change policyholders’ behaviour, such as triggering an increase in surrenders of their insurance contracts. Insurers’ own liquidity management may impact their ability to repay surrender amounts. Legacy businesses or products that are highly sensitive to market variables are likely to feel the effects of market volatility more deeply – e.g. variable and fixed annuities, long-term care insurance and universal life insurance. This applies especially to insurance contracts that contain minimum return guarantees. The measurement of insurance contract liabilities could be affected directly, including when contracts are measured under the variable fee approach.

      If information affecting the values of assets and liabilities becomes available after the reporting date, then insurers will need to distinguish between events that provide evidence of conditions that existed at the reporting date and those that are indicative of conditions that arose after the reporting date. [IAS 10.3, 8, 10]

      Life-and-health insurers need to monitor external events that may affect mortality or morbidity rates, financial assumptions and policyholder behaviours. External events may give rise to new and emerging trends whose ultimate effects are uncertain. Health insurers might experience elevated claims when tariffs affect imported pharmaceuticals or medical devices, or if supply chain challenges arise.

      These insurers will need to assess whether they need to revise their assumptions at the reporting date.

      Reinsurers will need to respond to losses ceded by direct insurers and perform similar evaluations. For some specialised reinsurers, this could have a major impact.

       

      Impact on investment portfolios under IFRS 9 Financial Instruments

      Insurers need to assess whether the measurement of expected credit losses appropriately reflects the impact of increased economic uncertainty for financial instruments that are not classified as at fair value through profit or loss.

      Insurers need to determine if the fair values of financial assets measured on that basis are appropriately determined and disclosed. Performing a valuation in periods of increased economic uncertainty is more challenging, particularly when significant unobservable inputs are used.

      What do insurers need to disclose?

      Insurers may need to disclose the following in their annual financial statements.

      • Significant judgements
        Insurers disclose the significant judgements made in applying IFRS 17. This includes inputs, assumptions and estimation techniques used in the measurement of insurance contract liabilities. Insurers also disclose information that focuses on the insurance and financial risks arising from insurance contracts. This may involve explaining the impact of risks arising from an external event on their type of insurance business, how experience to date varies from existing assumptions about these risks and how they are managed. In addition, an external event may require specific disclosures to explain any impact on the insurer.
      • Sensitivity analyses and other risk disclosures
        Insurers disclose information about sensitivities to changes in risk variables arising from contracts in the scope of IFRS 17. The disclosures also include considerations around risk concentrations, claims development tables and credit, liquidity and market risk. [IFRS 17.117–132]
        The uncertainty around these events may increase the level of estimation uncertainty when measuring insurance liabilities. This may require enhanced disclosures and could affect sensitivity analysis disclosures. [IAS 1.125, IFRS 17.93–94, 117–132]
      • Confidence-level disclosures
        Insurers disclose the confidence level used to determine the risk adjustment for non-financial risk. If insurers use a technique other than the confidence-level technique, then they disclose the technique used along with the confidence level corresponding to the results of that technique. In uncertain times, insurers may revisit measurement of the compensation for risk, including how they determined the underlying probability distributions. This may impact the confidence levels disclosed.
      • Changes in accounting estimates
        Insurers disclose changes in estimates under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Examples of such changes include updated discount rates, inflation assumptions and risk adjustment assumptions. An insurer explains both the nature and the amount of any change in an accounting estimate that affects the current period or is expected to affect future periods. [IAS 8.39–40]
      • Financial instruments
        For investment portfolios, insurers disclose the nature and extent of risks arising from financial instruments and how they manage those risks. This means that insurers will need to explain the significant impacts of these uncertainties on those risks and how they are managing them. Insurers will need to exercise judgement to determine the specific disclosures that are relevant to their business and necessary to meet these objectives. [IFRS 7.31–42]
      • Subsequent events
        Decreases in asset valuations may impact regulatory capital and solvency calculations and disclosures about how the company manages capital. Disclosures may also be required about events occurring after the reporting date that impact subsequent financial asset or insurance liability measurements. [IAS 10.21–22, 134–136, IFRS 17.126]

      Some insurers may need to provide additional disclosures around potential going concern issues.

      Interim reports

      IAS 34 Interim Financial Reporting does not contain specific disclosure requirements for insurance contracts. However, the general principles in the accounting standard apply such that the interim financial statements explain the events significant to understanding changes in financial position and performance, including changes in estimates, since the last annual financial statements. Management considers whether the interim report needs to include an update to information disclosed in the last annual financial statements because of external events or other uncertainties. [IAS 34.10, 15–16A]

      What about other accounting topics for insurers?

      For other topics that may be relevant for insurers, see our Uncertain times reporting hub.

      Actions for management

      • Evaluate the company's specific implications based on the significant judgements and accounting policies applied under IFRS 17 and assess the impact on assumptions for measuring insurance contract liabilities. Provide clear and meaningful disclosures about judgements and assumptions made.
      • Reflect the implications of relevant risks and uncertainties in fulfilment cash flows, and update scenario-based actuarial modelling accordingly. Monitor the developments and effective dates of any relevant regulations and scrutinise both the insurance claims supply chain and the macroeconomic impacts. Identify areas where specific input costs drive claims inflation.
      • Ensure that IFRS 17 measurements (including IACF asset recoverability testing) are based on current estimates of future cash flows reflecting the probability-weighted mean of a full range of possible outcomes and evaluate whether any onerous contract losses or IACF impairments need to be recognised in profit or loss.
      • Evaluate the potential for increased fraudulent claims in a downturn and implement effective controls.
      • Assess whether the measurement of expected credit losses appropriately reflects the impact of economic uncertainty and external events.
      • Consider expanding disclosures about risk management, key insurance and financial assumptions, sensitivities in the assumptions, major sources of estimation uncertainty, and liquidity, market and credit risks. These disclosures need to specifically cover the implications of an external event if it has a material impact on the company.
      • Consider capital disclosures, especially where there are concerns about the capital position relative to regulatory requirements or implications for debt covenants.
      • Ensure that the information provided in the company's financial statements and elsewhere – e.g. in the sustainability-related disclosures and management commentary – is connected and tells a clear and consistent story.

      Read further insights from KPMG insurance leaders across the globe in our Insurance contracts topic page.

      References to ‘Insights’ mean our publication Insights into IFRS®

      1 References to ‘insurance contract liabilities’ also apply to insurance contract assets.

      2 Investment contracts with discretionary participation features are in the scope of IFRS 17 if the issuer of the contracts also issues insurance contracts in the scope of IFRS 17.

      3 References to ‘insurance contracts’ also apply to reinsurance contracts issued, reinsurance contracts held and investment contracts with discretionary participation features in the scope of IFRS 17.

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