Insurance accounting changed permanently the day IFRS 17 replaced IFRS 4. For insurers, reinsurers, and takaful operators in Saudi Arabia, this was not a minor update to existing practice. It was a full rebuild of how insurance contracts are measured, recognized, and disclosed, and it touched nearly every part of the finance function along the way.

The Saudi Central Bank (SAMA) requires insurers and reinsurers to report under IFRS, which makes IFRS 17 compliance mandatory rather than optional. Yet the standard remains one of the most technically demanding pieces of accounting guidance ever issued, and many finance teams are still working through the practical realities of applying it consistently, period after period.

This guide walks through what IFRS 17 actually requires, where insurers most commonly run into trouble, and what a properly built IFRS 17 process looks like in practice.

Why IFRS 17 Replaced IFRS 4

IFRS 4 was always intended as an interim standard. It allowed insurers to largely continue using their existing local accounting practices, which meant insurance accounting varied enormously from one jurisdiction to another and even from one insurer to another within the same market. Comparing two insurers’ financial statements under IFRS 4 was often close to impossible.

IFRS 17 was designed to fix that by introducing one consistent measurement approach globally. It requires insurers to:

• Recognize profit as insurance coverage is provided, rather than upfront at policy inception
• Reflect the time value of money in the measurement of insurance liabilities
• Separate insurance service results from investment or financial results
• Recognize losses on onerous contracts immediately rather than deferring them
• Provide far more granular disclosure of how insurance contract balances have moved during the period

The result is a standard that gives investors, regulators, and analysts a genuinely comparable view of insurance profitability, but one that requires a fundamentally different accounting process to produce.

The Three Measurement Models

The starting point for any IFRS 17 implementation is determining which measurement model applies to each portfolio of contracts.

General Measurement Model (GMM)

The GMM is the default model under IFRS 17 and applies unless a portfolio qualifies for a simplified approach. Under the GMM, the insurance contract liability is built from four components:

• The present value of future cash flows expected under the contract
• A risk adjustment for non-financial risk
• The Contractual Service Margin, representing unearned profit
• Discounting to reflect the time value of money

This model is typically applied to longer duration contracts such as life insurance, where cash flows extend well beyond a single year and the passage of time materially affects the value of future obligations.

Premium Allocation Approach (PAA)

The PAA is a simplified version of the GMM available for contracts with a coverage period of one year or less, or where the simplification would not produce materially different results from the GMM. Most short duration general insurance products, including motor, property, and travel insurance, typically qualify for the PAA. It is considerably less operationally burdensome than the GMM, which is why most insurers try to structure eligible portfolios to use it wherever the standard permits.

Variable Fee Approach (VFA)

The VFA applies to contracts with direct participation features, essentially insurance contracts that are substantially investment related, where the insurer’s fee varies based on the performance of underlying items. This model is common for certain unit linked or with profits style products and requires its own distinct treatment of the CSM to reflect the variable nature of the insurer’s fee.

Selecting the correct model for each portfolio is not a one time decision made in isolation. It requires a documented assessment that an auditor can follow, and that assessment needs to be revisited whenever a new product is launched or an existing product is materially amended.

The Contractual Service Margin: The Hardest Part of IFRS 17

If there is one component of IFRS 17 that causes the most operational difficulty, it is the Contractual Service Margin, commonly referred to as the CSM.

The CSM represents the unearned profit an insurer expects to recognize as it provides insurance coverage over the life of the contract. Rather than recognizing profit at policy inception, IFRS 17 requires that profit to be released gradually, in line with the coverage being provided.

What makes the CSM difficult to manage:

• It must be rolled forward every single reporting period, not calculated once and left alone
• The roll forward incorporates several distinct adjustments, including the effect of new contracts written during the period, changes in estimates of future cash flows, interest accretion, and the release of margin recognized as revenue
• Experience adjustments, meaning the difference between what was expected and what actually happened, need to be correctly allocated between the CSM and the income statement
• The CSM cannot go negative. Once it is reduced to zero, any further unfavorable changes in estimates must be recognized immediately as a loss, which is what creates an onerous contract

Because the CSM roll forward touches so many moving parts, it is also one of the areas auditors scrutinize most closely. A CSM that cannot be clearly reconciled period over period, with each adjustment traceable back to its source, is a common reason for delayed audit sign-off.

Risk Adjustment for Non-Financial Risk

Alongside the CSM, insurers must determine a risk adjustment for non-financial risk. This reflects the compensation an insurer requires for bearing the uncertainty around the amount and timing of cash flows arising from non-financial risk, separate from financial risks like interest rate movements.

There is no single prescribed method for calculating the risk adjustment under IFRS 17. Insurers can use a range of actuarial techniques, but whichever method is chosen must be:

• Applied consistently across reporting periods
• Documented clearly enough to demonstrate the confidence level it implies
• Disclosed in a way that allows users of the financial statements to understand the level of risk aversion reflected in the number

Because there is judgment involved, this is another area where a defensible, well-documented methodology matters as much as the calculation itself.

Contract Boundaries and Grouping

IFRS 17 requires insurers to determine the boundary of each insurance contract, meaning the point up to which future cash flows are included in the measurement of the contract. Cash flows relating to future insurance contracts, or to periods beyond the contract boundary, are excluded.

Contracts must then be grouped into units of account based on:

• Contracts issued within the same annual cohort, generally no more than one year apart
• Whether the contract is profitable, onerous, or has no significant risk of becoming onerous

This grouping directly affects how the CSM is calculated and how losses are recognized, which means getting the grouping wrong can distort reported profitability across an entire portfolio, not just an individual contract.

Reinsurance Contracts Held

Reinsurance contracts held by an insurer are measured separately from the underlying insurance contracts they relate to, using broadly similar principles but with important differences. This is one of the more frequently misunderstood areas of IFRS 17, particularly around:

• Recognizing a loss recovery component when underlying contracts become onerous
• Measuring the reinsurance CSM, which can in some circumstances be negative, unlike the CSM on direct insurance contracts
• Aligning the timing of reinsurance recognition with the underlying contracts being reinsured

Insurers with significant reinsurance programs need this area modeled correctly, since errors here can materially misstate both gross and net insurance results.

Onerous Contract Testing

IFRS 17 requires insurers to identify onerous contracts, meaning contracts expected to generate a net loss, at initial recognition and to reassess this at each subsequent reporting date. Where a contract is onerous, the loss must be recognized immediately in the income statement rather than spread over the coverage period.

This is a deliberate design choice in the standard: profits are recognized gradually, but losses are recognized immediately. Insurers need a process that continuously monitors portfolios for onerous contracts, not just a check performed once at the point of sale.

Transition Approaches

For insurers transitioning to IFRS 17, or reassessing an earlier transition decision, the standard sets out three possible approaches, applied on a cohort by cohort basis depending on data availability:

• Full retrospective approach. This applies IFRS 17 as if it had always been in effect, requiring historical data reaching back to the inception of contracts still in force. It produces the most accurate transition balances but is often impractical for older contracts where the necessary data was never captured.
• Modified retrospective approach. This allows the use of reasonable and supportable information, along with specified modifications, when full retrospective data is not available, while still aiming to get as close as possible to the retrospective result.
• Fair value approach. This measures the CSM at transition based on the fair value of the group of contracts less the fulfilment cash flows at that date. It is the most commonly used approach for older or data poor portfolios, but it also tends to produce a different CSM balance than the other two methods, which affects reported profit for years after transition.

The choice of transition method has a lasting impact on reported results, sometimes for a decade or more after the transition date, which is why it deserves careful analysis and clear documentation rather than a default selection made under time pressure.

Disclosure Requirements

IFRS 17 significantly expands what insurers must disclose compared to IFRS 4. Financial statements need to include:

• A reconciliation of insurance contract balances from the opening to closing position, split by the components described above
• An analysis of insurance revenue and insurance service expenses
• Information about the amount, timing, and uncertainty of future cash flows arising from insurance contracts
• Disclosure of significant judgments made in applying the standard, including the methods used to determine the risk adjustment and the discount rates applied
• A confirmation of the transition approach used and its effect on the financial statements, where relevant

Alongside the IFRS requirements, insurers in Saudi Arabia also need to align disclosures with SAMA’s expectations, which in some areas go beyond the minimum the standard technically requires.

Common Implementation Pitfalls

Having worked with insurers navigating IFRS 17, a few issues come up repeatedly.

The actuarial to finance handoff is often the weakest link

Actuaries produce outputs designed for actuarial purposes, and finance teams need those outputs translated into journal entries, disclosures, and reconciliations that hold up under audit. When that bridge is not properly built, the result is usually a manual scramble at year end, with finance and actuarial teams reconciling numbers under time pressure rather than working from an established process.

The CSM roll forward is rarely built to be repeatable

Many first year implementations get the CSM calculated correctly once, but do not build a sustainable process for rolling it forward every quarter without heavy manual intervention.

Model selection is not revisited as products change

A portfolio correctly assessed as PAA eligible at launch can drift out of eligibility as product features change, and insurers do not always catch this in time.

Disclosure is treated as an afterthought

Insurers sometimes focus heavily on getting the measurement right and then rush the disclosures at the end of the reporting cycle, which is exactly where auditors tend to focus first.

What a Well-Run IFRS 17 Process Looks Like

A properly designed IFRS 17 process generally includes the following elements:

• A clear, documented assessment of which measurement model applies to each portfolio, with the rationale spelled out in a way an auditor can follow without back and forth
• A validated CSM build that can be rolled forward reliably each period, with every adjustment traceable to its source
• Proper contract boundary and grouping decisions, separating profitable, onerous, and borderline contracts
• A defensible, consistently applied risk adjustment methodology
• Disclosures that meet both IFRS and SAMA expectations, prepared alongside the measurement work rather than after it
• A genuine working relationship between the actuarial and finance functions, built around a repeatable handoff rather than an annual reconciliation exercise

None of this happens by accident. It requires deliberate design work up front, followed by a process that finance and actuarial teams can actually run on their own once the initial build is complete.

Where Har Aik Global Associates Fits In

Har Aik Global Associates works with insurers, reinsurers, and takaful operators across Saudi Arabia on exactly this problem. Our team combines technical accounting depth with practical insurance industry experience, so we are not just applying the standard in the abstract. Our IFRS 17 support includes:

• Measurement model assessment and selection for each portfolio
• CSM build, validation, and ongoing roll forward support
• Risk adjustment methodology design and documentation
• Contract boundary and grouping assessments
• Transition approach analysis and supporting documentation
• Reinsurance contracts held measurement
• Onerous contract testing
• Financial statement disclosures aligned with IFRS and SAMA expectations
• A structured bridge between your actuarial function and your finance team
• Post-implementation reviews for insurers already reporting under IFRS 17
• Training for internal finance and actuarial teams so IFRS 17 reporting becomes sustainable in house

For insurers that have already implemented IFRS 17, post-implementation reviews are particularly valuable, since methodology gaps and disclosure weaknesses often stay hidden until an auditor or regulator flags them. Catching those issues early is far less costly than fixing them under scrutiny.

The Bottom Line

IFRS 17 is not a standard that gets easier with familiarity alone. It requires a deliberate, well-documented process built around the specific structure of your insurance contracts, and a genuine working relationship between your actuarial and finance teams. Insurers who treat it that way from the start spend far less time firefighting at year end, and far more time focused on the business itself.

If your organization is preparing for IFRS 17 implementation, working through a transition, or reviewing an existing implementation for gaps, HarAik’s dedicated IFRS 17 advisory service is built to help. Visit our Technical Accounting and IFRS Support page to learn more, or book a consultation to discuss your specific portfolio.