Definition:General model
📘 General model — also known as the building block approach (BBA) — is the default measurement model under IFRS 17 for valuing insurance contracts, requiring insurers to measure contract liabilities as the sum of three components: fulfilment cash flows, a risk adjustment for non-financial risk, and a contractual service margin (CSM). It applies to all insurance and reinsurance contracts unless they qualify for the simplified premium allocation approach (PAA) or are direct participating contracts measured under the variable fee approach (VFA). The general model represents a fundamental shift from the diverse legacy accounting treatments that existed across jurisdictions, imposing a single, globally consistent framework for recognizing insurance revenue and profit over the coverage period.
🧩 Under the general model, fulfilment cash flows comprise probability-weighted estimates of all future cash inflows and outflows — premiums, claims, expenses, and acquisition costs — discounted using rates that reflect the characteristics of the liabilities. The risk adjustment quantifies the compensation an insurer demands for bearing the uncertainty inherent in those cash flows, with its magnitude and technique (confidence level, cost of capital, or other method) left to management judgment and disclosed to users. The CSM captures the unearned profit embedded in a group of contracts and prevents insurers from recognizing that profit at inception; instead, it is released systematically over the coverage period based on coverage units. Each reporting period, insurers must update their estimates of future cash flows: changes related to future service adjust the CSM, while changes related to current or past service flow through profit or loss immediately.
🔑 Mastering the general model has proven to be one of the most demanding aspects of IFRS 17 adoption. The requirement to track the CSM at the level of groups of contracts — determined by grouping criteria based on profitability, cohort year, and portfolio — necessitates granular data infrastructure and actuarial systems that many insurers did not previously possess. Life insurers with long-duration policies have borne the greatest implementation burden, as their contracts cannot use the simpler PAA and must be fully modeled under the general model or VFA. Across Europe, parts of Asia, and other IFRS-adopting jurisdictions, the general model has altered how analysts and investors evaluate insurer performance, shifting attention from earned premiums toward insurance service revenue and CSM growth as key indicators of franchise value. For insurers still operating under US GAAP — where IFRS 17 does not apply — the general model nonetheless influences global comparisons and reinsurance negotiations with IFRS-reporting counterparties.
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