IFRS 17 General Measurement Model GMM

 

What is it?

The GMM is the IFRS17 measurement model. This model sets out the measurement principles for IFRS17.  It defines how the initial measurement of the asset and liability of the insurance contact should be initially be recognised and remeasured over time.  It defines how the revenue and profit are realised over the life of the contract.

 

When is it used?

The General Measurement Model can be used for any insurance contract, including reinsurance, that is covered by IFRS17 unless an insurance company chooses to use any of the other variations, ie it is the default option.  If an insurance company chooses not to use the GMM then it will have to justify that choice and for many contracts it will be the only option.

 

How does it work?

The GMM is sometimes called the Building Block Approach.  This is because the measurement of the insurance contract is broken into a number of blocks these are the future cash flows, discount adjustment and risk adjustment.  The total of these blocks, for profitable contracts, is the insurance asset called the fulfilment cash flows. The liability is then the same amount but with the opposite sign which is the called the Contractual Service Margin (“CSM”)

Future cash flows are the total expected future cash flows the insurer expects to receive or pay out over the life of the contract. This includes the premium and claims but also covers items like acquisition costs, certain expenses and for some products, investment related cash flows.

The future cash flows should be discounted if material so that they are in effect adjusted to reflect the time value of money and any financial risk.  The discount rate used should reflect the nature of the cash flows.

The risk adjustment is a measure of the non-financial risk and reflects the fact that the cash flows may not be as expected in terms of both timing and amount.

The CSM is released to the P&L as service is delivered.  The insurer must measure service it delivers for each product in terms of coverage units which then drive the release calculation of the CSM balance.

If the insurance contract is a loss making or onerous contract then the fulfilment cash flows will be negative. In this case the loss must be fully recognised in the profit and loss account.

The insurer must measure the contracts in groups. These are defined based on portfolios that consist of contracts with similar risks that are managed together.  The portfolios are further divided into time cohorts (which cannot be more than 1 year) and profitability groups splitting the contracts into onerous contracts, contracts that have little chance of becoming onerous and the rest.  Once the groups are established contracts cannot be subsequently moved to another group.