The landscape of insurance accounting has undergone a seismic shift.1 If you are a financial professional navigating the 2025–2026 reporting cycles, you already know that the “old way” of doing things—specifically under IFRS 4—is now a relic of the past.
The Liability Adequacy Test (LAT), once a flexible and often varied assessment, has been fundamentally transformed by the global adoption of IFRS 17.2 Whether you are applying the General Measurement Model (GMM) or the Premium Allocation Approach (PAA), understanding how to ensure your liabilities are “adequate” is no longer just a compliance task—it’s a critical measure of solvency and transparency.
Here is your comprehensive guide to applying the modern Liability Adequacy Test (now primarily recognized as the Onerous Contract Test) in 2025 and 2026.
1. From LAT to Onerous Contract Testing: What Changed?
Under the previous standard (IFRS 4), the Liability Adequacy Test was a “catch-all” check to see if your insurance liabilities were sufficient to cover future obligations. It often allowed for “locked-in” assumptions from the start of the contract.
In 2025 and 2026, the game is different. IFRS 17 requires a “current value” approach.3 This means you must use updated, market-consistent data at every reporting date. The concept of an “adequate” liability is now embedded in the Onerous Contract Test, which identifies loss-making groups of contracts immediately rather than spreading the pain over time.4
2. The Step-by-Step Application Process
To apply the modern equivalent of the LAT today, follow this structured workflow:
Step A: Grouping and Level of Aggregation
You cannot test adequacy at a “global” company level. IFRS 17 requires you to divide contracts into:
- Portfolios: Contracts with similar risks managed together.5
- Groups: Further divided by profitability (e.g., onerous, no significant risk of becoming onerous, and others) and by annual cohorts (contracts issued within the same 12-month period).6
Step B: Calculating Fulfillment Cash Flows (FCF)
This is the core of the test. You must calculate the present value of all future cash outflows (claims, expenses) minus inflows (premiums).7
- Use Current Assumptions: Update your mortality, morbidity, and lapse rates based on 2025 data.
- Discount Rates: Use current market-based discount rates that reflect the liquidity characteristics of the insurance contracts.8
Step C: The Risk Adjustment
Unlike the old LAT, you must now include an explicit Risk Adjustment for Non-Financial Risk.9 This represents the compensation the entity requires for bearing the uncertainty about the amount and timing of the cash flows.
Step D: Identification of Onerous Contracts
If the sum of the Fulfillment Cash Flows and the Risk Adjustment results in a net outflow, the group is “onerous.”
- Transactional Impact: You must recognize this loss in your Profit & Loss (P&L) statement immediately.10
- Loss Component: A “loss component” is created within the Liability for Remaining Coverage (LRC), which tracks the loss to be reversed in future periods as the service is provided.
3. Special Considerations for 2025 and 2026
As we move further into the post-transition era, two factors are becoming increasingly critical:
- Economic Volatility: With fluctuating interest rates in 2025, your discount rates will significantly impact the adequacy of your liabilities.11 A small drop in rates can turn a profitable group of contracts into an onerous one overnight.
- Data Refinement: By 2026, regulators expect “model refinement.” The “placeholder” assumptions used during the initial 2023 transition are no longer acceptable. Your 2026 LAT application should demonstrate high-quality, granular data.
4. Summary Table: IFRS 4 vs. IFRS 17 (2026 Standards)
| Feature | Old LAT (IFRS 4) | Modern Test (IFRS 17) |
| Assumptions | Often “Locked-in” at inception | Must be Current at every date |
| Level of Testing | Highly aggregated (often portfolio) | Granular (Groups & Annual Cohorts) |
| Risk Margin | Implicit or varied | Explicit Risk Adjustment |
| Loss Recognition | Only if a deficiency is found | Immediate for any Onerous Group |
| Discounting12 | Optional in some jurisdictions13 | Mandatory using market rates14 |
Conclusion: Staying Ahead of the Curve
Applying the Liability Adequacy Test in 2025–2026 is less about a single year-end “check” and more about a continuous, data-driven valuation process. By focusing on granular grouping and current market assumptions, you ensure that your financial statements reflect the true economic reality of your insurance obligations.
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