IAS 37 Provision Calculator
for Insurance

IAS 37 Provisions in Insurance

Insurance entities require careful attention to a critical scope boundary: insurance claims provisions — the reserves for expected future claims payments — are governed by IFRS 17 Insurance Contracts, not IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37.5(a) explicitly excludes obligations arising under insurance contracts within the scope of IFRS 17. This means the fulfilment cash flows, risk adjustment, and contractual service margin calculations that dominate insurance financial statements are entirely outside the scope of this calculator. However, insurance companies do carry significant IAS 37 provisions for obligations that are not insurance contracts: litigation and legal claims, regulatory penalties, restructuring costs, environmental obligations (particularly for legacy asbestos-related books of business), onerous reinsurance contracts, and operational matters. These non-insurance provisions can be material and require the same IAS 37 recognition and measurement framework as any other entity.

Measurement Considerations for Insurance

For insurance entities, the IAS 37 provision assessment requires careful separation from the IFRS 17 measurement model. Litigation provisions are the most common IAS 37 item for insurers, arising from coverage disputes, bad faith claims, broker negligence, and class action lawsuits. These should be measured using IAS 37's best estimate framework — either single best estimate for individual claims or expected value for claim populations. Legacy book provisions, particularly for asbestos and environmental liability, can extend over decades and require significant discounting. The boundary between an IFRS 17 insurance obligation and an IAS 37 provision is not always clear-cut: for example, a regulatory fine for mis-selling insurance products is an IAS 37 provision, while the obligation to pay out on the mis-sold policies is an IFRS 17 obligation.

Regulatory Context and Audit Considerations

Insurance regulators (EIOPA, PRA, BaFin) focus primarily on Solvency II capital adequacy and IFRS 17 reserve adequacy, but IAS 37 provisions also affect solvency calculations because they represent liabilities that reduce own funds. Auditors of insurance entities must coordinate their IAS 37 provision work with the actuarial team responsible for IFRS 17 fulfilment cash flows, ensuring that there is no gap or overlap between the two frameworks. Conduct risk provisions have become increasingly significant for insurers following regulatory focus on treating customers fairly, product governance, and value for money.

Worked Example: European Assurance Group NV

The insurer faces a class action lawsuit from 2,400 policyholders alleging mis-selling of payment protection policies. Legal counsel assesses a 65% probability of an adverse judgment:

Expected value = (35% × €0) + (40% × €7.68M) + (25% × €15.42M) = €0 + €3,072,000 + €3,855,000 = €6,927,000. This is an IAS 37 provision for the legal claim, separate from any IFRS 17 obligation to honour valid insurance policies. Legal defence costs of approximately €800,000 should be added to the provision amount.