IFRS - Building Block 1
The first building block is defined as “a current, unbiased and probability weighted estimate of the cash flows from the insurance contract”. This first building block comprises the projected future cash flows expected to arise as the insurer fulfils the obligation under the insurance contract being measured. The contract boundary, an important and innovative feature of this model, is defined as the point at which the insurer can unilaterally terminate or re-underwrite a policyholder’s contract. All cash flows that fall within the period set by the contract boundary should be included in this building block. The insurance contract should be initially recognised at the earlier of the signing date or the effective date of the contract and derecognised when it no longer represents a liability of the insurer.
The process to estimate these future cash flows is not based on fair value concepts; instead it should reflect the insurer’s own perspective and should cover all future cash flows (on an expected value basis i.e. probability weighted) that are integral to the fulfilment of the insurance contract including premiums, expenses, benefits and claims payments, as well as the incremental acquisition costs, and the benefits that an insurer expects to pay to policyholders of participating insurance contracts (policyholder dividends). Observable market data must be considered in developing the estimates whenever it feeds directly in the variables used to determine the expected present value. For example, market interest rates must be considered to determine the discount rate underpinning the second building block. Due to this “entity specific” approach focused on the entity’s fulfilment obligations, this method is referred to as the “current fulfilment value” approach.
A very important characteristic of the first building block of the measurement model is that it requires the inclusion, among the contractual cash flows, of acquisition costs that are directly attributable and incremental to the activities of selling, underwriting, and initiating each individual insurance contract. All other acquisition costs for the sale and underwriting of insurance contracts, as well as the costs for aborted sales, must be expensed as incurred. This is in line with all other IFRS.
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