building-block approach

If you wanted to honestly value a promise to pay uncertain future amounts, you'd build the answer from a few clearly separated pieces rather than guessing a single lump number: how much do we expect to pay, when, how risky is that, and what profit have we not yet earned? IFRS 17's building-block approach (also called the general measurement model) does exactly this — it assembles the value of an insurance liability out of distinct, transparent components.

There are essentially three building blocks, plus a fourth element for unearned profit. Block one is the present value of the best-estimate future cash flows — premiums coming in, claims and expenses going out — discounted for the time value of money using current rates. Block two is the risk adjustment for non-financial risk, the compensation for uncertainty. Together these two form the 'fulfilment cash flows.' The contractual service margin (the unearned profit) is then added so that no profit is recognized at inception. For example, expected cash outflows with present value 1,000, plus a risk adjustment of 70, give fulfilment cash flows of 1,070; if expected profit is 130, a CSM of 130 brings the total liability at issue to 1,200.

Why it matters: the building-block approach is the default ('general') model under IFRS 17, used for long-duration contracts like life insurance and annuities, with simplified alternatives (the premium allocation approach) for short contracts and a variant (the variable fee approach) for participating business. Its strength is transparency — each block can be examined, disclosed, and re-measured separately, so a reader can see what drives a change in the liability rather than facing one opaque figure.