How Insurers Really Earn Revenue and recognize Expenses Under IFRS17

Estimated Reading Time: 5 minutes

The way insurers measure and report revenue has undergone a quiet revolution. Under IFRS 17, and particularly through its General Measurement Model (GMM), revenue is no longer a simple reflection of premiums received. Instead, it’s intricately tied to the insurance services provided, the unearned profits from contracts, and the risk compensation built into pricing. For professionals used to traditional premium-minus-claims thinking, this can feel like a completely new language. But when broken down, the logic of GMM not only makes sense; it actually offers a clearer, more faithful view of how insurers create and earn value.

Traditionally, insurers recognized premium income as it was received and deducted claims and expenses when paid or incurred. Under IFRS 4 and local GAAPs, that approach was practical, but it often obscured the real timing of profitability. A big premium didn’t necessarily mean the insurer had earned revenue yet. Likewise, a spike in claims might distort profit trends without distinguishing whether it related to current or past coverage. IFRS 17 resolves this ambiguity by tying revenue recognition directly to the services delivered in a reporting period.

At the heart of this model is the concept of the Liability for Remaining Coverage (LRC). This is the portion of expected future outflows, like claims, expenses, and profit, that the insurer has yet to “earn” because the coverage hasn’t yet been provided. As the insurer delivers that coverage, the LRC reduces. That reduction, combined with the release of the risk adjustment and contractual service margin (unearned profit), forms the insurance revenue for the period.

Have you signed up to our weekly job alerts on Actuary List? We post 50 new handpicked jobs every week that match your expertise. To ensure you don’t miss out, sign up here. Here are a few examples of new jobs this week:

Let’s unpack the three components that drive insurance revenue under IFRS 17.

· The first component is the release of expected claims and benefits. When actuaries price a group of insurance contracts, they estimate the present value of all future claims, benefits, and expenses (excluding acquisition costs). This is part of the fulfillment cash flows. But that full amount isn’t recognized immediately; it’s allocated across the coverage period based on how services are expected to be delivered. In a simple one-year policy with even service delivery, the expected $100 in claims might be allocated as $25 per quarter. Each period, this “used up” portion of the LRC becomes part of the revenue. Importantly, this isn’t actual cash flow. It’s the accounting recognition that the insurer has now delivered that portion of the insurance service it promised.

· The second component is the release of the Contractual Service Margin (CSM). The CSM represents unearned profit; the value the insurer expects to make after covering all expected claims, expenses, and risk compensation. IFRS 17 prohibits upfront recognition of this profit. Instead, the CSM is amortized over the contract’s coverage period, in line with the services delivered. If an insurer expects to earn $30 from a contract, and coverage is even over a year, then $7.50 in profit might be released each quarter. This reflects not just prudent accounting, but a more aligned view of performance over time.

· The third component is the release of the risk adjustment (RA). Insurance is about managing uncertainty. The RA represents the insurer’s compensation for bearing non-financial risk; things like variability in claims severity, lapse risk, or deviation from assumptions. As coverage is delivered and uncertainty reduces, the insurer gradually releases part of this RA into revenue. Like the CSM, this release is systematic and reflects the remaining risk exposure across time.

Taken together, these components give a revenue figure that is tied to actual economic service delivery. Let’s visualize this through a simple example. Suppose a policy has a premium of $150. The expected present value of future claims and benefits is $100, the RA is $20, and the CSM (profit) is $30.

If the insurer provides full coverage evenly during Year 1, then the entire $150 would be recognized as revenue over the year; $100 from the release of expected cash flows, $20 from the RA release, and $30 from the CSM amortization. Even though no actual claims may be paid out in a given month, revenue still flows based on the coverage provided and uncertainty reduced.

Now let’s move to the expense side: insurance service expense. This reflects the actual cost incurred for providing insurance coverage in the reporting period. The first and most intuitive part is the expected claims and benefits for that period. If the policy was expected to have $100 in claims over the year, and service is provided evenly, then $25 is allocated to each quarter. This amount mirrors the release of service cash flows in revenue, which are two sides of the same coin.

But then reality enters the picture. What if actual claims deviate from what was expected? IFRS 17 captures this through a category called “changes related to current service.” If the insurer expected $25 in claims for Q1, but actual claims are $30, that $5 difference is recognized immediately as an experience loss. It raises the total insurance service expense for that period. Conversely, if actual claims were only $20, the insurer recognizes an experience gain, lowering that period’s expense.

Let’s walk through different claim outcomes for our one-year policy:

Actual claims ended up at $115, meaning a $15 experience loss. The insurer still recognizes $150 in revenue but now must account for the higher-than-expected cost of providing coverage, reducing the profit. This dynamic ensures that results reflect real economic performance; not just actuarial estimates set at contract inception.

This distinction between expected and actual outcomes is where actuaries play a pivotal role. They’re not just pricing policies; they’re continuously updating assumptions, evaluating risk trends, and refining how future service is valued and how past service is judged. The shift from premium-based to service-based revenue demands actuaries stay closely aligned with finance, product, and claims teams to ensure accurate, timely valuation of both revenue and expense.

Moreover, IFRS 17 doesn’t just improve transparency; it forces insurers to think differently about value creation. Under older standards, profitability was often front-loaded or smoothed over time, creating a distorted view of performance. Now, with revenue tied to delivery and profit recognition gated by service, the results are more meaningful for investors, more defensible to regulators, and more useful for internal decision-making.

For insurers, adapting to this model is not just about compliance. It’s about using the data already within the business, cash flow forecasts, claims development patterns, lapse rates, to tell a better story. A story where revenue reflects actual value delivered, and where surprises, whether positive or negative, are recognized transparently.

In a world of rising insurance complexity, tighter regulation, and growing pressure for clear financial communication, this alignment of accounting and economics isn’t just a technical upgrade. It’s a strategic advantage.

Imad Uddin Shaikh is an Accounting, Audit and Risk Expert and Founder specializing in IFRS advisory, ECL modeling, business valuation, and financial reporting.