Ind AS 117 in Action: New Insurance Accounting Standard in India

Have you ever wondered how insurance companies actually report their profits?

It’s not as simple as premiums credit and claims debit. The accounting behind insurance contracts can get pretty complicated and it is defined by the Ind AS 117.

It brings consistency, transparency and a much-needed global alignment to how insurance contracts are accounted for. Ready to pull back the curtain and explore what Ind AS 117 really means, Ind AS-117 accounting principle and how it’s impacting the insurance sector in India today.

1. Why Did We Need Ind AS-117 in the First Place?

Before Ind AS 117, the accounting for insurance contracts in India was kind of all over the place. Imagine trying to compare apples and oranges: different companies used different methods, assumptions were unclear and profits could be recognized in wildly different ways.

What made the old system problematic:

1. Inconsistent methods across different companies.
2. Profit recording differs as some insurers showed profits upfront, others waited till full realisation.
3. Estimates in liabilities made hard for investors and regulators to understand the true financial health of insurance companies.

India’s version of adopting the international IFRS 17 standard is a revolutionary framework for insurance contract accounting.

2. What is Ind AS 117?

Ind AS 117 tell us how insurance companies should recognize, measure and report their insurance contracts. It’s designed to provide a clear picture of the insurer’s financial position and performance as given in our Ind AS guide.

The key idea is that insurers need to account for the expected future cash flows (FCF) from insurance contracts, adjusted for risk and insurance profit recognition in India over the period they provide insurance coverage.

3. What Kinds of Contracts Does Ind AS 117 Cover?

Ind AS 117 applies to contracts where insurers take on significant insurance risk, meaning they promise to compensate policyholders if certain uncertain events occur having adverse impact on the holder. These include life insurance, health insurance, fire and motor insurance and more.

Mostly relevant for:

• Insurance companies
• Reinsurance contracts
• Investment contracts with discretionary participation features (provides holder a guaranteed return plus a bonus) only if the entity also sells insurance contracts.

So, what Ind AS-117 does not cover?

Contracts that do not transfer significant insurance risk are outside the scope of Ind AS 117. This includes manufacturer warranties, employee benefit plans and most financial guarantee contracts, which are covered by other Indian accounting standards.

4. Ind AS 117 accounting principles: Measuring Insurance Contracts

Ind AS 117 introduces two main measurement approaches:

1. General Measurement Model (GMM)

This is the default method for most insurance contracts, especially those with longer coverage periods.

It works as follows:

• Estimate all FCF the insurer expects to receive or pay, premiums, claims, expenses, commissions, you name it.
• Discount those cash flows to their present value using current market interest rates, reflecting the time value of money.
• Add a risk adjustment to account for uncertainty in those estimates.
• Calculate the Contractual Service Margin (CSM), which represents the insurer’s expected profit at contract inception. This profit is recognized gradually over time the contract, bit by bit instead of all at once.

2. Premium Allocation Approach (PAA)

For short-term contracts like motor insurance(those lasting 12 months or less), the PAA offers a simplified way to measure liabilities.

• An insurer receives premiums and records a liability for remaining coverage.
• This liability is then gradually reduced over the period the insurance protection is provided.
• The amount by which the liability is reduced each period is recognized as insurance revenue.

5. How Does Profit Recognition Change Under Ind AS 117?

One of the biggest shifts with Ind AS-117 is how profits are recognized. Earlier, profits could be wavy either all initially or delayed making it hard to understand a company’s true performance through comparison.

Now, thanks to the CSM mechanism, profits are spread over the contract’s lifetime, reflecting the actual delivery of insurance services. Now, by chance, estimates change like claims lower than expected the CSM adjusts, increasing profits accordingly.

This creates a much smoother and realistic profit pattern, which investors love.

6. Implementation Challenges: It’s Not All Easy

Don’t be fooled, as new this Indian accounting standard is, Ind AS 117 implementation is no walk in the park. It demands:

• Transition from Indian GAAP to Ind AS 101.
• Requires accurate data and advanced actuarial models to estimate future cash flows.
• Upgraded IT infrastructure to handle complex calculations and regular updates.
• Training for finance and actuarial teams to understand the new standard and work together efficiently. Consider expertInd – AS consultancy services.
• Proper documentation to justify assumptions and decisions.

Insurance companies need to prepare well in advance to avoid costly errors.

7. A Simple Example of Ind AS 117: Valuing a 20-Year Term Life Insurance Policy

Demach Ltd., an insurance company, is issuing a 20-year term life policy.

1. Annual premium: ₹ 10,000
2. Coverage: ₹ 1,00,000
3. Expected annual claim: ₹ 1,000 (1% of sum assured)
4. Discount rate: 5%
5. Risk Adjustment: ₹ 5,000

Calculations:

1. Net Inflow per year = ₹ 10,000 (premium) – ₹ 1,000 (expected claim)

2. Present Value of Net Cash Flows = ₹ 9,000 x 12.46 (PV factor) = ₹ 1,12,140

2. Add Risk Adjustment = ₹ 1,12,140 + ₹ 5,000 = ₹ 1,17,140

3. Present Value of Premiums = ₹ 10,000 x 12.46 = ₹ 1,24,600

4. Contractual Service Margin (CSM) = ₹ 1,24,600 – ₹ 1,17,140 = ₹ 7,460, recognised over 20 years (7,460/20 = ₹ 373).

At inception (Journal Entry):

Bank / Receivable                         Dr. ₹ 10,000

To Insurance Contract Liability     Cr. ₹ 9,627

To CSM                                              Cr. ₹ 373

Subsequently, Demach Ltd. will:

1. Recognise part of the CSM as insurance revenue (profit).
2. Re-measure fulfilment cash flows for claims, risk, discounting, risk if needed
3. Recognise insurance service revenue and expense in P&L

8. A Few More Things You Might Want to Know: Ind AS 117 FAQs

1. How is Ind AS 117 different from Ind AS 104?

Ind AS 104 was an older & limited standard. Ind AS 117 is the full & updated rule for accounting insurance contracts consistently.

2. What is reinsurance and how is it accounted under Ind AS 117?

Reinsurance is insurance companies buying insurance to reduce their risk. Ind AS 117 covers it with special rules, treating it separately.

3. When does Ind-AS 117 apply?

Ind-AS 117 was officially effective date of April 1, 2023 (FY 2023-24), the IRDAI is overseeing a phased implementation. Insurers are working towards compliance based on a specific roadmap provided by the regulator.

4. What are onerous contracts under Ind-AS 117?

If a contract is expected to lose money, the insurer must recognize the loss immediately instead of waiting.

Master Brains’ Final Thoughts

Yes, Indian accounting standard 117 brings a steep learning curve and implementation challenges, but it’s a huge step forward for India’s insurance industry. It means fairer, more consistent accounting, giving everyone, from companies to investors, a development which is much awaited in insurance sector.

Think of it like switching from manual bookkeeping to a modern automated system: but assistance and Master Brains’ Ind AS advisory services is always there for you and your business.

Is Your Insurance Business Ready for Ind AS 117?

If you’re in the insurance sector, it’s time to:

Review your actuarial and accounting processes.

Upgrade your IT and reporting systems.

Get Ind AS Advisory from Master Brains on Ind AS 117’s principles.

Call us today:+91-8595867402

Email us now: masterbrains.office@gmail.com