Insurance Contracts

This exposure draft Insurance Contracts is published by the International
Accounting Standards Board (IASB) for comment only. The proposals may be
modified in the light of the comments received before being issued in final form
as an International Financial Reporting Standard (IFRS). Comments on the
exposure draft and the Basis for Conclusions should be submitted in writing so
as to be received by 30 November 2010. Respondents are asked to send their
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Copyright © 2010 IFRS Foundation®
ISBN for this part: 978-1-907026-91-1
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CONTENTS
paragraph
INTRODUCTION AND INVITATION TO COMMENT IN1–IN30
[DRAFT] INTERNATIONAL FINANCIAL REPORTING STANDARD X
INSURANCE CONTRACTS
OBJECTIVE 1
SCOPE 2–12
RECOGNITION 13–15
MEASUREMENT 16–66
DERECOGNITION 67–68
PRESENTATION 69–78
DISCLOSURE 79–97
EFFECTIVE DATE AND TRANSITION 98–102
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
APPROVAL BY THE BOARD OF INSURANCE CONTRACTS
BASIS FOR CONCLUSIONS see separate booklet
EXPOSURE DRAFT JULY 2010
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INTRODUCTION AND INVITATION TO COMMENT
Introduction
Reasons for publishing the exposure draft
IN1 The International Accounting Standards Board (the Board or IASB) has
published the exposure draft Insurance Contracts to propose significant
improvements to the accounting for insurance contracts. Such
improvements are needed urgently. Many users of financial statements
describe insurance accounting today as a ‘black box’ that does not provide
them with relevant information about an insurer’s financial position and
financial performance.
IN2 The proposals in the exposure draft, if confirmed, would:
(a) provide a comprehensive framework that will require insurers to
provide information that is relevant to users of financial
statements for economic decision-making.
(b) eliminate inconsistencies and weaknesses in existing practices, by
replacing IFRS 4 Insurance Contracts. IFRS 4 is an interim standard
that allows insurers to continue using various existing accounting
practices that have developed in a piecemeal fashion over many
years.
(c) provide comparability across entities, jurisdictions and capital
markets.
Main features of the exposure draft
IN3 The exposure draft proposes a comprehensive measurement approach for
all types of insurance contracts issued by entities (and reinsurance
contracts held by entities), with a modified approach for some
short-duration contracts. The approach is based on the principle that
insurance contracts create a bundle of rights and obligations that work
together to generate a package of cash inflows (premiums) and outflows
(benefits and claims). An insurer would apply to that package of cash
flows a measurement approach that uses the following building blocks:
(a) a current estimate of the future cash flows
(b) a discount rate that adjusts those cash flows for the time value of
money
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(c) an explicit risk adjustment
(d) a residual margin.
IN4 For most short-duration contracts, a modified version of the
measurement approach would apply:
(a) During the coverage period, the insurer would measure the
contract using an allocation of the premium received, on a basis
largely similar to much existing practice.
(b) The insurer would use the building block approach to measure
claims liabilities for insured events that have already occurred.
Development of the proposals
IN5 The proposals in the exposure draft are the result of extensive
deliberations following the publication of a discussion paper Preliminary
Views on Insurance Contracts in May 2007, consultations with the IASB’s
Insurance Working Group (IWG) and input from participants in a
targeted field test in late 2009.
IN6 The Board developed the proposals jointly with the US Financial
Accounting Standards Board (FASB). The boards reached the same
conclusions in many areas, but reached different conclusions in areas
summarised in the invitation to comment that follows and in the
appendix to the Basis for Conclusions. The FASB plans to publish a
discussion paper to seek additional input from constituents. That
discussion paper would present the IASB’s proposals, the FASB’s tentative
decisions, and a comparison of each of those models with existing
US generally accepted accounting principles (GAAP).
Invitation to comment
IN7 The Board invites comments on any aspect of the exposure draft of its
proposed IFRS Insurance Contracts. It would particularly welcome answers
to the questions set out below. Comments are most helpful if they:
(a) respond to the questions as stated,
(b) indicate the specific paragraph or paragraphs to which the
comments relate,
(c) contain a clear rationale, and
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(d) describe any other approaches the Board should consider, if
applicable.
IN8 Respondents need not comment on all of the questions and are
encouraged to comment on any additional issues.
IN9 The Board will consider all comments received in writing by
30 November 2010. In considering the comments, the Board will base its
conclusions on the merits of the arguments for and against each
approach, not on the number of responses supporting each approach.
Measurement
(paragraphs 16–61, B34–B110 and BC45–BC155)
Measurement model
(paragraphs 16–53 and BC45–BC144)
IN10 The exposure draft proposes a measurement model for all types of
insurance (and reinsurance) contracts that, except for modification for
short-duration contracts (see paragraph IN15), uses:
(a) a direct measurement that incorporates current, discounted
estimates of future cash flows revised at each reporting date,
adjusted for the effects of uncertainty about the amount and
timing of those future cash flows (ie a risk adjustment); and
(b) a margin that reports profitability of the contracts over their
coverage period (ie a residual margin).
IN11 The risk adjustment represents the maximum amount that an insurer
would rationally pay to be relieved of the risk that the ultimate fulfilment
cash flows exceed those expected. It is remeasured at the end of each
reporting period and declines over time as the insurer is released from
risk.
IN12 The residual margin is calibrated at inception to an amount that means
the insurer recognises no gain on entering into an insurance contract.
The residual margin is released over the coverage period in a systematic
manner based on the passage of time, unless the pattern of claims and
benefits makes another pattern more appropriate.
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IN13 For US GAAP, the FASB reached a different conclusion. The FASB
concluded that the model should not include a separate risk adjustment
and residual margin, but should instead combine these in a single
composite margin. The composite margin is released over both the
coverage period and the claims handling period on the basis of the
insurer’s exposure from the provision of insurance coverage, and the
insurer’s exposure from uncertainties associated with future cash flows.
IN14 Insurers often incur significant costs to sell, underwrite and initiate a
new insurance contract (ie acquisition costs). The exposure draft requires
an insurer:
(a) to include incremental acquisition costs for contracts actually
issued in the initial measurement as part of the contract cash
flows. As a result, those costs affect profit over the coverage period,
rather than at inception.
(b) to recognise all other acquisition costs as an expense when
incurred.
Question 1 – Relevant information for users
(paragraphs BC13–BC50)
Do you think that the proposed measurement model will produce
relevant information that will help users of an insurer’s financial
statements to make economic decisions? Why or why not? If not, what
changes do you recommend and why?
Question 2 – Fulfilment cash flows (paragraphs 17(a), 22–25,
B37–B66 and BC51)
(a) Do you agree that the measurement of an insurance contract
should include the expected present value of the future cash
outflows less future cash inflows that will arise as the insurer
fulfils the insurance contract? Why or why not? If not, what do
you recommend and why?
(b) Is the draft application guidance in Appendix B on estimates of
future cash flows at the right level of detail? Do you have any
comments on the guidance?
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Question 3 – Discount rate (paragraphs 30–34 and BC88–BC104)
(a) Do you agree that the discount rate used by the insurer for
non-participating contracts should reflect the characteristics of
the insurance contract liability and not those of the assets
backing that liability? Why or why not?
(b) Do you agree with the proposal to consider the effect of liquidity,
and with the guidance on liquidity (see paragraphs 30(a), 31 and
34)? Why or why not?
(c) Some have expressed concerns that the proposed discount rate
may misrepresent the economic substance of some long-duration
insurance contracts. Are those concerns valid? Why or why not?
If they are valid, what approach do you suggest and why?
For example, should the Board reconsider its conclusion that the
present value of the fulfilment cash flows should not reflect the
risk of non-performance by the insurer?
Question 4 – Risk adjustment versus composite margin
(paragraphs BC105–BC115)
Do you support using a risk adjustment and a residual margin (as the
IASB proposes), or do you prefer a single composite margin (as the FASB
favours)? Please explain the reason(s) for your view.
Question 5 – Risk adjustment (paragraphs 35-37, B67-B103 and
BC105–BC123)
(a) Do you agree that the risk adjustment should depict the
maximum amount the insurer would rationally pay to be
relieved of the risk that the ultimate fulfilment cash flows
exceed those expected? Why or why not? If not, what
alternatives do you suggest and why?
(b) Paragraph B73 limits the choice of techniques for estimating risk
adjustments to the confidence level, conditional tail expectation
(CTE) and cost of capital techniques. Do you agree that these
three techniques should be allowed, and no others? Why or why
not? If not, what do you suggest and why?
(c) Do you agree that if either the CTE or the cost of capital method
is used, the insurer should disclose the confidence level to which
the risk adjustment corresponds (see paragraph 90(b)(i))? Why or
why not?
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(d) Do you agree that an insurer should measure the risk adjustment
at a portfolio level of aggregation (ie a group of contracts that are
subject to similar risks and managed together as a pool)? Why or
why not? If not, what alternative do you recommend and why?
(e) Is the application guidance in Appendix B on risk adjustments at
the right level of detail? Do you have any comments on the
guidance?
Question 6 – Residual/composite margin (paragraphs 17(b),
19–21, 50–53 and BC124–BC133)
(a) Do you agree that an insurer should not recognise any gain at
initial recognition of an insurance contract (such a gain arises
when the expected present value of the future cash outflows plus
the risk adjustment is less than the expected present value of the
future cash inflows)? Why or why not?
(b) Do you agree that the residual margin should not be less than
zero, so that a loss at initial recognition of an insurance contract
would be recognised immediately in profit or loss (such a loss
arises when the expected present value of the future cash
outflows plus the risk adjustment is more than the expected
present value of future cash inflows)? Why or why not?
(c) Do you agree that an insurer should estimate the residual or
composite margin at a level that aggregates insurance contracts
into a portfolio of insurance contracts and, within a portfolio, by
similar date of inception of the contract and by similar coverage
period? Why or why not? If not, what do you recommend and
why?
(d) Do you agree with the proposed method(s) of releasing the
residual margin? Why or why not? If not, what do you suggest
and why (see paragraphs 50 and BC125–BC129)?
(e) Do you agree with the proposed method(s) of releasing the
composite margin, if the Board were to adopt the approach that
includes such a margin (see the Appendix to the Basis for
Conclusions)? Why or why not?
(f) Do you agree that interest should be accreted on the residual
margin (see paragraphs 51 and BC131–BC133)? Why or why not?
Would you reach the same conclusion for the composite margin?
Why or why not?
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Short-duration contracts
(paragraphs 54–60 and BC145–BC148)
IN15 A premium allocation model is proposed as a modified measurement for
the pre-claims liabilities of some short-duration insurance contracts
(unless the contract is onerous).
Cash flows that arise from future premiums
(paragraphs 26–29 and BC53–BC66)
IN16 To identify the future cash flows that are expected to arise as the insurer
fulfils the obligation, it is necessary to determine whether future
premiums (and resulting benefits and claims) arise from:
(a) existing contracts (included in the liability measurement) or
(b) future contracts (not included in the measurement).
IN17 To achieve this distinction, paragraph 27 of the exposure draft proposes
that the boundary of an insurance contract would be the point at which
an insurer either:
(a) is no longer required to provide coverage, or
Question 7 – Acquisition costs (paragraphs 24, 39 and
BC135–BC140)
(a) Do you agree that incremental acquisition costs for contracts
issued should be included in the initial measurement of the
insurance contract as contract cash outflows and that all other
acquisition costs should be recognised as expenses when
incurred? Why or why not? If not, what do you recommend and
why?
Question 8 – Premium allocation approach
(a) Should the Board (i) require, (ii) permit but not require, or (iii)
not introduce a modified measurement approach for the
pre-claims liabilities of some short-duration insurance contracts?
Why or why not?
(b) Do you agree with the proposed criteria for requiring that
approach and with how to apply that approach? Why or why
not? If not, what do you suggest and why?
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(b) has the right or the practical ability to reassess the risk of the
policyholder and, as a result, can set a price that fully reflects that
risk.
Participating features
(paragraphs 23, 62–66, BC67–BC75 and BC198–BC203)
IN18 Some insurance contracts provide policyholders with a right to
participate in the favourable performance of a specified class of contracts,
related assets or both (ie a participating feature). The exposure draft
proposes that payments arising from the participating feature should be
included in the measurement of insurance contracts in the same way as
any other contractual cash outflows (ie on an expected present value
basis).
IN19 Some insurers issue financial instruments with discretionary participation
features similar to those found in some participating insurance contracts.
The Board proposes to include these contracts within the scope of the
IFRS, if specified conditions are met. For US GAAP, the FASB has tentatively
decided to include these contracts within the scope of its financial
instruments standards.
Question 9 – Contract boundary principle
Do you agree with the proposed boundary principle and do you think
insurers would be able to apply it consistently in practice? Why or why
not? If not, what would you recommend and why?
Question 10 – Participating features
(a) Do you agree that the measurement of insurance contracts
should include participating benefits on an expected present
value basis? Why or why not? If not, what do you recommend
and why?
(b) Should financial instruments with discretionary participation
features be within the scope of the IFRS on insurance contracts,
or within the scope of the IASB’s financial instruments
standards? Why?
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Definition and scope
(paragraphs 2–7, B2–B33 and BC188–BC209)
IN20 The proposed definition of an insurance contract is based on the transfer
of significant insurance risk to the insurer, used in IFRS 4. Appendix B
provides guidance on the definition. The scope exclusions are listed in
paragraph 4 of the exposure draft.
(c) Do you agree with the proposed definition of a discretionary
participation feature, including the proposed new condition that
the investment contracts must participate with insurance
contracts in the same pool of assets, company, fund or other
entity? Why or why not? If not, what do you recommend and
why?
(d) Paragraphs 64 and 65 modify some measurement proposals to
make them suitable for financial instruments with discretionary
participation features. Do you agree with those modifications?
Why or why not? If not, what would you propose and why? Are
any other modifications needed for these contracts?
Question 11 – Definition and scope
(a) Do you agree with the definition of an insurance contract and
related guidance, including the two changes summarised in
paragraph BC191? If not, why not?
(b) Do you agree with the scope exclusions in paragraph 4? Why or
why not? If not, what do you propose and why?
(c) Do you agree that the contracts currently defined in IFRSs as
financial guarantee contracts should be brought within the
scope of the IFRS on insurance contracts? Why or why not?
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Unbundling (paragraphs 8–12 and BC210–BC225)
IN21 The exposure draft proposes that an insurer should account for
investment (ie financial) and service components separately from the
insurance component (ie unbundling) when there is:
(a) an investment component reflecting an account balance that
meets specified criteria;
(b) an embedded derivative that is separated from its host in
accordance with IAS 39 Financial Instruments: Recognition and
Measurement; and
(c) contractual terms relating to goods and services that are not
closely related to the insurance coverage but have been combined
in a contract with that coverage for reasons that have no
commercial substance.
Presentation (paragraphs 69–78 and BC150–BC183)
IN22 The exposure draft proposes a presentation of the statement of
comprehensive income that will help users of an insurer’s financial
statements understand important performance factors; such information
is lacking under many existing models, particularly for life contracts. The
presentation also fits together naturally with the proposed measurement
approach for insurance contracts. The proposed presentation would
achieve this by presenting income and expense in a manner that
highlights:
(a) the underwriting margin (ie changes in the risk adjustment and
release of the residual margin);
(b) experience adjustments (ie differences between actual cash flows
and previous estimates) and changes in estimates (ie changes in
current estimates of cash flows and discount rates); and
Question 12 – Unbundling
Do you think it is appropriate to unbundle some components of an
insurance contract? Do you agree with the proposed criteria for when
this is required? Why or why not? If not, what alternative do you
recommend and why?
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(c) interest on insurance contract liabilities (presented or disclosed in
a way that highlights its relationship with the investment return
on assets backing those liabilities).
IN23 An insurer would be required to present all income and expense arising
from insurance contracts in profit and loss.
Disclosures (paragraphs 79–97, BC242 and BC243)
IN24 The objective of the proposed disclosure requirements is to help users of
financial statements understand the amount, timing and uncertainty of
cash flows arising from insurance contracts. Specifically, the proposed
disclosure principle requires an insurer to explain:
(a) the amounts recognised in the financial statements arising from
insurance contracts and
(b) the nature and extent of risks arising from those contracts.
Question 13 – Presentation
(a) Will the proposed summarised margin presentation be useful to
users of financial statements? Why or why not? If not, what
would you recommend and why?
(b) Do agree that an insurer should present all income and expense
arising from insurance contracts in profit or loss? Why or why
not? If not, what do you recommend and why?
Question 14 – Disclosures
(a) Do you agree with the proposed disclosure principle? Why or
why not? If not, what would you recommend, and why?
(b) Do you think the proposed disclosure requirements will meet the
proposed objective? Why or why not?
(c) Are there any disclosures that have not been proposed that would
be useful (or some proposed that are not)? If so, please describe
those disclosures and explain why they would or would not be
useful.
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Unit-linked contracts (paragraphs 8(a)(i), 71 and 78,
Appendix C, and paragraphs BC153–BC155 and
BC184–BC187)
IN25 For unit-linked contracts (sometimes known as variable contracts), the
exposure draft proposes that, for assets for which existing requirements
result in an accounting mismatch, an insurer should recognise the
underlying assets and measure them at fair value through profit or loss.
With respect to those assets, this proposal would require consequential
amendments to:
(a) IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments, to address shares issued by the insurer.
(b) IAS 16 Property, Plant and Equipment, to address property occupied by
the insurer.
IN26 In addition:
(a) the proposals on unbundling (see paragraph IN21) are relevant for
unit-linked contracts.
(b) the exposure draft proposes presentation requirements for
unit-linked contracts and related assets.
Reinsurance (paragraphs 43–46 and BC230–BC241)
IN27 The proposals in the exposure draft would also apply to the reinsurance
contracts that an insurer holds. The Board has identified no reason for
different measurement approaches for direct insurance liabilities and
reinsurance liabilities.
IN28 A cedant faces the risk that the reinsurer may default. The Board
proposes an expected loss model for reinsurance assets. In other words,
the measurement of the reinsurance asset would incorporate a reduction
for the expected (ie probability-weighted) present value of losses from
default or disputes.
Question 15 – Unit-linked contracts
Do you agree with the proposals on unit-linked contracts? Why or why
not? If not what do you recommend and why?
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Transition and effective date
(paragraphs 98–102 and BC244–BC257)
IN29 The proposed transition requirements are in paragraphs 98–102. As noted
in the Basis for Conclusions on IFRS 9, the Board will consider delaying the
effective date of IFRS 9 if the IFRS on insurance contracts has a mandatory
effective date later than 1 January 2013.
Other comments
Question 16 – Reinsurance
(a) Do you support an expected loss model for reinsurance assets?
Why or why not? If not, what do you recommend and why?
(b) Do you have any other comments on the reinsurance proposals?
Question 17 – Transition and effective date
(a) Do you agree with the proposed transition requirements? Why
or why not? If not, what would you recommend and why?
(b) If the Board were to adopt the composite margin approach
favoured by the FASB, would you agree with the FASB’s tentative
decision on transition (see the appendix to the Basis for
Conclusions)?
(c) Is it necessary for the effective date of the IFRS on insurance
contracts to be aligned with that of IFRS 9? Why or why not?
(d) Please provide an estimate of how long insurers would require to
adopt the proposed requirements.
Question 18 – Other comments
Do you have any other comments on the proposals in the exposure
draft?
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Benefits and costs (paragraphs BC258–BC263)
IN30 When the Board develops an IFRS it assesses whether the overall benefits
of improved financial information justify the costs of providing it.
Question 19 – Benefits and costs
Do you agree with the Board’s assessment of the benefits and costs of
the proposed accounting for insurance contracts? Why or why not? If
feasible, please estimate the benefits and costs associated with the
proposals.
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[Draft] International Financial Reporting Standard X Insurance Contracts ([draft]
IFRS X) is set out in paragraphs 1–102 and Appendices A–C. All the paragraphs
have equal authority. Paragraphs in bold type state the main principles.
Terms defined in Appendix A are in italics the first time they appear in the
[draft] Standard. Definitions of other terms are given in the Glossary for
International Financial Reporting Standards. [Draft] IFRS X should be read in
the context of its objective and the Basis for Conclusions, the Preface to
International Financial Reporting Standards and the Framework for the Preparation and
Presentation of Financial Statements. IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors provides a basis for selecting and applying accounting
policies in the absence of explicit guidance.
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[Draft] International Financial Reporting Standard X
Insurance Contracts
Objective
1 The objective of this [draft] IFRS is to establish the principles that an
entity should apply to report useful information to users of its financial
statements about the amount, timing and uncertainty of cash flows from:
(a) insurance contracts that it issues,
(b) reinsurance contracts that it holds, and
(c) financial instruments containing discretionary participation features
that it issues.
Scope
2 An entity shall apply this [draft] IFRS to:
(a) insurance contracts (including reinsurance contracts) that it issues
and reinsurance contracts that it holds.
(b) financial instruments that it issues containing a discretionary
participation feature (see paragraphs 62–66).
3 This [draft] IFRS does not address other aspects of accounting by insurers,
such as accounting for their financial assets and financial liabilities,
other than those mentioned in paragraph 2(b) (see IFRS 9 Financial
Instruments, IFRS 7 Financial Instruments: Disclosures, IAS 32 Financial
Instruments: Presentation and IAS 39 Financial Instruments: Recognition and
Measurement), except in the transition requirements in paragraph 102.
4 An entity shall not apply this [draft] IFRS to:
(a) product warranties issued by a manufacturer, dealer or retailer
(see IAS 18 Revenue and IAS 37 Provisions, Contingent Liabilities and
Contingent Assets).
(b) employers’ assets and liabilities under employee benefit plans
(see IAS 19 Employee Benefits and IFRS 2 Share-based Payment) and
retirement benefit obligations reported by defined benefit
retirement plans (see IAS 26 Accounting and Reporting by Retirement
Benefit Plans).
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(c) contractual rights or contractual obligations that are contingent
on the future use of, or right to use, a non-financial item (eg some
licence fees, royalties, contingent lease payments and similar
items, see IAS 17 Leases, IAS 18 and IAS 38 Intangible Assets).
(d) residual value guarantees provided by a manufacturer, dealer or
retailer, as well as a lessee’s residual value guarantee embedded in
a finance lease (see IAS 17 and IAS 18).
(e) fixed-fee service contracts that have as their primary purpose the
provision of services, but expose the service provider to risk because
the level of service depends on an uncertain event, for example
maintenance contracts in which the service provider agrees to repair
specified equipment after a malfunction (see IAS 18). However, an
insurer shall apply this [draft] IFRS to insurance contracts in which
the insurer provides goods or services to the policyholder to
compensate the policyholder for insured events.
(f) contingent consideration payable or receivable in a business
combination (see IFRS 3 Business Combinations).
(g) direct insurance contracts that the entity holds (ie direct insurance
contracts in which the entity is the policyholder). However, a cedant
shall apply this [draft] IFRS to reinsurance contracts that it holds.
5 For ease of reference, this [draft] IFRS describes any entity that issues an
insurance contract as an insurer, whether or not the issuer is regarded as
an insurer for legal or supervisory purposes.
6 A reinsurance contract is a type of insurance contract. Accordingly, all
references in this IFRS to insurance contracts also apply to reinsurance
contracts.
7 Appendix B provides guidance on the definition of an insurance contract
(see paragraphs B2–B33).
Unbundling
8 Some insurance contracts contain one or more components that would
be within the scope of another IFRS if the insurer accounted for those
components as if they were separate contracts, for example an
investment (financial) component or a service component. If a
component is not closely related to the insurance coverage specified in a
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contract, an insurer shall apply that other IFRS to account for that
component as if it were a separate contract (ie shall unbundle that
component). The following are the most common examples of
components that are not closely related to the insurance coverage:
(a) an investment component reflecting an account balance that
meets both of the following conditions:
(i) the account balance is credited with an explicit return (ie it is
not an implicit account balance, for example derived by
discounting an explicit maturity value at a rate not explicitly
stated in the contract); and
(ii) the crediting rate for the account balance is based on the
investment performance of the underlying investments,
namely a specified pool of investments for unit-linked
contracts, a notional pool of investments for index-linked
contracts or a general account pool of investments for
universal life contracts. That crediting rate must pass on to
the individual policyholder all investment performance, net
of contract fees and assessments. Contracts meeting those
criteria can specify conditions under which there may be a
minimum guarantee, but not a ceiling, because a ceiling
would mean that not all investment performance is passed
through to the contract holder.
(b) an embedded derivative that is separated from its host contract in
accordance with IAS 39 (see paragraph 12 below).
(c) contractual terms relating to goods and services that are not
closely related to the insurance coverage but have been combined
in a contract with that coverage for reasons that have no
commercial substance.
9 In unbundling an account balance specified in paragraph 8(a), an insurer
shall regard all charges and fees assessed against the account balance, as
well as cross-subsidy effects included in the crediting rate, as belonging
to either the insurance component or another component, but are not
part of the investment component. Thus, the crediting rate used in
determining that account balance reflects a crediting rate after
eliminating any cross-subsidy between that rate and the charges or fees
assessed against the account balance.
10 An insurer shall not unbundle components of a contract that are closely
related to the insurance coverage specified in the insurance contract.
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11 Throughout this [draft] IFRS, the term insurance contract refers to the
components of an insurance contract that remain after unbundling any
components in accordance with paragraph 8.
Embedded derivatives
12 IAS 39 applies to a derivative embedded in an insurance contract unless
the embedded derivative is itself an insurance contract. IAS 39 requires
an entity to separate an embedded derivative from its host contract,
measure it at fair value and recognise changes in its fair value in profit or
loss, if the embedded derivative meets both of the following criteria:
(a) The economic characteristics and risks of the embedded derivative
are not closely related to the economic characteristics and risks of
the host insurance contract (see paragraphs AG30–AG33 of IAS 39).
The economic characteristics and risks of an embedded derivative
are closely related to the economic characteristics and risks of the
host insurance contract if, for example, the embedded derivative
and the host insurance contract are so interdependent that an
entity cannot measure the embedded derivative separately, ie
without considering the host contract (see paragraph AG33(h) of
IAS 39).
(b) A separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative and be within
the scope of IAS 39 (eg the derivative itself is not an insurance
contract).
Recognition
13 An insurer shall recognise an insurance contract liability or an insurance
contract asset when the insurer becomes a party to the insurance contract.
14 An insurer becomes a party to an insurance contract on the earlier of the
following two dates:
(a) when the insurer is bound by the terms of the insurance contract,
and
(b) when the insurer is first exposed to risk under the contract, which
is when the insurer can no longer withdraw from its obligation to
provide insurance coverage to the policyholder for insured events
and no longer has the right to reassess the risk of the particular
policyholder and, as a result, cannot set a price that fully reflects
that risk.
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15 An insurer shall not recognise as a liability or an asset any amounts
relating to possible claims under future insurance contracts (such as the
amounts described in some jurisdictions as catastrophe provisions or
equalisation provisions). This [draft] IFRS does not prohibit an entity from
presenting such amounts by appropriating retained earnings to reserves
within equity. IAS 1 Presentation of Financial Statements requires an entity to
describe the nature and purpose of each reserve within equity.
Measurement
16 Paragraphs 17–53 describe the measurement model that an insurer shall
apply to all insurance contracts, except some short-duration contracts
specified in paragraph 54, for which paragraphs 55–60 describe a
modified version of that model.
Initial measurement
17 An insurer shall measure an insurance contract initially at the sum of:
(a) the expected present value of the future cash outflows less future
cash inflows that will arise as the insurer fulfils the insurance
contract, adjusted for the effects of uncertainty about the amount
and timing of those future cash flows (present value of the fulfilment
cash flows, see paragraph 22); and
(b) a residual margin that eliminates any gain at inception of the
contract. A residual margin arises when the amount in (a) is less
than zero (ie when the expected present value of the future cash
outflows plus the risk adjustment is less than the expected present
value of the future cash inflows).
18 If the present value of the fulfilment cash flows specified in paragraph 17(a)
is greater than zero (ie the expected present value of the future cash
outflows plus the risk adjustment exceeds the expected present value of
the future cash inflows), the insurer shall immediately recognise that
amount in profit or loss as an expense.
19 It follows from paragraphs 17 and 18 that the measurement of an
insurance contract at initial recognition is:
(a) zero, if the present value of the fulfilment cash flows is zero or less.
(b) the present value of the fulfilment cash flows, if that present value
is greater than zero.
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20 An insurer shall determine the residual margin in paragraph 17(b) at a
level that aggregates insurance contracts into a portfolio of insurance
contracts and, within a portfolio, by similar date of inception of the
contract and by similar coverage period.
21 An insurer can become a party to an insurance contract before the
coverage period starts. In many cases, the measurement of insurance
contracts does not change materially after initial recognition before the
start of the coverage period. During that time, the measurement of the
insurance contract is updated only for cash received or paid, the accretion
of interest, and changes in estimates of cash flows and discount rates.
An insurer shall start recognising the residual margin in profit or loss
only once the coverage period begins (see paragraph 50).
Present value of the fulfilment cash flows
22 The following building blocks constitute the present value of the
fulfilment cash flows:
(a) an explicit, unbiased and probability-weighted estimate
(ie expected value) of the future cash outflows less the future cash
inflows that will arise as the insurer fulfils the insurance contract
(paragraphs 23–25);
(b) a discount rate that adjusts those cash flows for the time value of
money (paragraphs 30–34); and
(c) an explicit estimate of the effects of uncertainty about the amount
and timing of those future cash flows (risk adjustment—paragraphs
35–37).
Future cash flows
23 Estimates of cash flows for a portfolio of insurance contracts shall
include all incremental cash inflows and cash outflows arising from that
portfolio, and shall:
(a) be explicit (ie separate from estimates of discount rates that adjust
those cash flows for the time value of money and the risk
adjustment that adjusts those cash flows for the effects of
uncertainty about the amount and timing of those future cash
flows).
(b) reflect the perspective of the entity but, for market variables, be
consistent with observable market prices.
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(c) incorporate, in an unbiased way, all available information about the
amount, timing and uncertainty of all cash flows that will arise as
the insurer fulfils the insurance contract.
(d) be current (ie the estimates shall reflect all available information at
the measurement date).
(e) include only those cash flows that arise from existing contracts
(ie cash inflows and cash outflows that arise within the boundary of
those contracts—see paragraphs 26 and 27).
24 At initial recognition, an insurer shall include in the measurement of the
insurance contract an estimate of all cash flows that will arise as the
insurer fulfils the insurance contract over the life of that contract. Some
of those cash flows are received or paid on the day the insurance contract
is initially recognised, for example initial premiums and some
incremental acquisition costs (see paragraph 39(a)). Those cash flows
result in a change in the carrying amount of the insurance contract
liability on the day the insurance contract is initially recognised, but
immediately after the moment of initial recognition.
25 Appendix B provides guidance for estimating future cash flows
(see paragraphs B37–B66).
Contract boundary
26 The measurement of an insurance contract shall include premiums and
other cash flows (eg claims and expenses) resulting from those premiums
if, and only if:
(a) the insurer can compel the policyholder to pay the premiums, or
(b) the premiums are within the boundary of that contract.
27 The boundary of an insurance contract distinguishes the future cash
flows that relate to the existing insurance contract from those that relate
to future insurance contracts. The boundary of an insurance contract is
the point at which an insurer either:
(a) is no longer required to provide coverage, or
(b) has the right or the practical ability to reassess the risk of the
particular policyholder and, as a result, can set a price that fully
reflects that risk. In assessing whether it can set a price that fully
reflects the risk, an insurer shall ignore restrictions that have no
commercial substance (ie no discernible effect on the economics of
the contract).
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28 Many insurance contracts have features that enable policyholders to take
actions that change the amount, timing, nature or uncertainty of the
benefits they will receive. Such features include surrender options,
conversion options and options to cease paying premiums but still
receive some benefits. The measurement of insurance contracts shall
reflect the future behaviour of policyholders on an expected value basis,
with an adjustment for the risk that the actual behaviour of the
policyholder may differ from the expected behaviour. For example, the
measurement of an insurance contract:
(a) shall not assume that all policyholders surrender their contracts
only because surrender would be unfavourable to the insurer.
(b) shall not assume that all policyholders continue their contracts
only because continuation would be unfavourable to the insurer.
29 If options, forwards and guarantees do not relate to the insurance
coverage under the existing insurance contract, they are not within the
boundary of that contract. The insurer shall account for those features as
new insurance contracts or other stand-alone instruments according to
their nature.
Time value of money
30 An insurer shall adjust the future cash flows for the time value of money,
using discount rates that:
(a) are consistent with observable current market prices for
instruments with cash flows whose characteristics reflect those of
the insurance contract liability, in terms of, for example, timing,
currency and liquidity.
(b) exclude any factors that influence the observed rates but are not
relevant to the insurance contract liability (eg risks not present in
the liability but present in the instrument for which the market
prices are observed).
31 As a result of the principle in paragraph 30, if the cash flows of an
insurance contract do not depend on the performance of specific assets,
the discount rate shall reflect the yield curve in the appropriate currency
for instruments that expose the holder to no or negligible credit risk,
with an adjustment for illiquidity (see paragraph 34).
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32 If the amount, timing or uncertainty of the cash flows arising from an
insurance contract depend wholly or partly on the performance of
specific assets, the measurement of the insurance contract shall reflect
that dependence. In some circumstances, the most appropriate way to
reflect that linkage might be to use a replicating portfolio technique (see
paragraphs B45–B47).
33 Estimates of cash flows and discount rates shall be internally consistent
to avoid double-counting or omissions. For example, nominal cash flows
(ie those that include the effect of inflation) shall be discounted at rates
that include the effect of inflation. Real cash flows (ie those that exclude
the effect of inflation) shall be discounted at rates that exclude the effect
of inflation.
34 Many insurance liabilities do not have the same liquidity characteristics as
assets traded in financial markets. For example, some government bonds
are traded in deep and liquid markets and the holder can typically sell
them readily at any time without incurring significant costs. In contrast,
policyholders cannot liquidate their investment in some insurance
contract liabilities without incurring significant costs, and in some cases
they have no contractual right to liquidate their holding at all. Thus, in
estimating discount rates for an insurance contract, an insurer shall take
account of any differences between the liquidity characteristics of the
instruments underlying the rates observed in the market and the liquidity
characteristics of the insurance contract.
Risk adjustment
35 The risk adjustment shall be the maximum amount the insurer would
rationally pay to be relieved of the risk that the ultimate fulfilment cash
flows exceed those expected.
36 An insurer shall estimate the risk adjustment at the level of a portfolio of
insurance contracts. Therefore, the risk adjustment shall reflect the
effects of diversification that arise within a portfolio of insurance
contracts, but not the effects of diversification between that portfolio and
other portfolios of insurance contracts.
37 Appendix B provides guidance for estimating the risk adjustment
(see paragraphs B67–B103).
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Non-performance risk
38 The present value of the fulfilment cash flows shall not reflect the risk of
non-performance by the insurer, either at initial recognition or
subsequently.
Acquisition costs
39 At initial recognition, an insurer shall:
(a) include incremental acquisition costs in the present value of the
fulfilment cash flows (see also paragraph B61(f)).
(b) recognise all acquisition costs other than those identified in (a) as an
expense when incurred.
Insurance contracts acquired in a portfolio transfer or
business combination
40 An insurer shall measure a portfolio of insurance contracts acquired in a
portfolio transfer at the higher of the following:
(a) the consideration received (after adjusting the consideration for
any other assets and liabilities acquired in the same transaction,
such as financial assets and customer relationships). The excess of
that consideration over the present value of the fulfilment cash
flows establishes the residual margin at initial recognition.
(b) the present value of the fulfilment cash flows. If that amount
exceeds the consideration received, the insurer shall recognise that
excess immediately as an expense.
41 In assessing whether a loss arises when acquiring a portfolio of insurance
contracts (see paragraph 40(b)), the insurer shall determine whether it
has recognised all of the intangible or other assets acquired in the
portfolio transfer, and shall review its measurement of that portfolio at
initial recognition.
42 An insurer shall measure a portfolio of insurance contracts acquired in a
business combination at the higher of the following:
(a) the fair value of the portfolio. The excess of that fair value over the
present value of the fulfilment cash flows establishes the residual
margin at initial recognition.
(b) the present value of the fulfilment cash flows. If that amount
exceeds the fair value of the portfolio, that excess increases the
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initial carrying amount of goodwill recognised in the business
combination.
Reinsurance contracts
43 Applying the same principles as those underlying paragraph 17, a cedant
shall measure a reinsurance contract at initial recognition as the sum of:
(a) the present value of the fulfilment cash flows (for this purpose the
expected present value of the cedant’s future cash inflows plus the
risk adjustment less the expected present value of the cedant’s
future cash outflows); and
(b) a residual margin, as described in paragraph 45.
44 The cedant shall estimate the present value of the fulfilment cash flows
for the reinsurance contract in the same manner as the corresponding
part of the present value of the fulfilment cash flows for the underlying
insurance contract or contracts, after remeasuring the underlying
insurance contract(s) on initial recognition of the reinsurance contract.
In addition, the cedant shall consider the risk of non-performance by the
reinsurer on an expected value basis when estimating the present value
of the fulfilment cash flows.
45 In accordance with paragraph 17, the residual margin cannot be negative.
Therefore, if the present value of the fulfilment cash flows for the
reinsurance contract is:
(a) less than zero (ie the expected present value of future cash inflows
plus the risk adjustment is less than the expected present value of
future cash outflows), the cedant shall establish that amount as
the residual margin at initial measurement.
(b) greater than zero (ie the expected present value of future cash
inflows plus the risk adjustment exceed the expected present value
of future cash outflows), the cedant shall recognise that amount as
a gain at initial recognition of the reinsurance contract.
46 The cedant shall treat ceding commissions it receives as a reduction of the
premium ceded to the reinsurer.
Subsequent measurement
47 The carrying amount of an insurance contract at the end of each
reporting period shall be the sum of:
(a) the present value of the fulfilment cash flows at that date, and
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(b) the remaining amount of the residual margin.
48 The present value of the fulfilment cash flows shall reflect all available
information at the end of the reporting period (ie it shall reflect current
estimates of the amount, timing and uncertainty of the remaining future
cash flows, current discount rates and a current risk adjustment).
An insurer shall review its estimates at that date and update them if
evidence indicates that previous estimates are no longer valid. In doing
so, an insurer shall consider both of the following:
(a) whether the updated estimates represent faithfully the conditions
at the end of the reporting period, and
(b) whether changes in estimates represent faithfully changes in
conditions during the period.
49 A cedant shall update the measurement of the present fulfilment cash
flows of a reinsurance contract for changes in the risk of
non-performance by the reinsurer.
50 An insurer shall recognise the residual margin determined at initial
recognition as income in profit or loss over the coverage period in a
systematic way that best reflects the exposure from providing insurance
coverage, as follows:
(a) on the basis of the passage of time, but
(b) on the basis of the expected timing of incurred claims and benefits,
if that pattern differs significantly from the passage of time.
51 An insurer shall accrete interest on the carrying amount of the residual
margin, using the discount rate specified in paragraph 30 as determined
at initial recognition.
52 The residual margin shall not be negative. Once the coverage period has
ended, the residual margin is zero; hence, after that point the contract
shall be measured as the present value of the fulfilment cash flows.
53 If fewer contracts are in force at the end of a period than was expected at
the beginning of the period, the amount of the residual margin
recognised in profit or loss during the period shall include an adjustment
to eliminate from the residual margin at the end of the reporting period
the portion relating to contracts that are no longer in force. If more
contracts are in force at the end of a period than was expected at the
beginning of the period, the insurer shall not increase the residual
margin.
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Pre-claims liability for short-duration contracts
54 Paragraphs 55–60 apply to insurance contracts that meet both of the
following conditions:
(a) The coverage period of the insurance contract is approximately one
year or less.
(b) The contract does not contain embedded options or other
derivatives that significantly affect the variability of cash flows,
after unbundling any embedded derivatives in accordance with
paragraph 12.
55 For those contracts, an insurer shall:
(a) measure its pre-claims liability by allocating premiums over the
coverage period as described in paragraphs 56–60.
(b) measure its claims liability at the present value of the fulfilment
cash flows, in accordance with paragraphs 22–46.
56 The pre-claims liability is the pre-claims obligation (as described in
paragraphs 57 and 58), less the expected present value of future
premiums, if any, that are within the boundary of the existing contract.
57 For insurance contracts specified in paragraph 54, an insurer shall
measure its pre-claims obligation at initial recognition as
(a) the premium, if any, received at initial recognition, plus the
expected present value of future premiums, if any, that are within
the boundary of the existing contract; less
(b) the incremental acquisition costs.
58 Subsequently, the insurer shall reduce the measurement of the pre-claims
obligation over the coverage period in a systematic way that best reflects
the exposure from providing insurance coverage, as follows:
(a) on the basis of the passage of time, but
(b) on the basis of the expected timing of incurred claims and benefits,
if that pattern differs significantly from the passage of time.
59 An insurer shall accrete interest on the carrying amount of the pre-claims
liability, using the discount rate specified in paragraph 30, updated in
each reporting period.
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60 An insurance contract is onerous if, at initial recognition or
subsequently, the present value of the fulfilment cash flows relating to
future insured claims that are within the boundary of an existing
contract exceeds the carrying amount of the pre-claims obligation. If a
contract is onerous, the insurer shall recognise an additional liability and
a corresponding expense, measured as the difference between the
carrying amount of the pre-claims obligation and the present value of the
fulfilment cash flows. To determine whether insurance contracts are
onerous and, if applicable, to measure the amount of the additional
liability, the insurer shall aggregate the insurance contracts into a
portfolio and, within a portfolio, by similar date of inception. An insurer
shall update the measurement of that additional liability at the end of
each reporting period and reverse it to the extent that the insurance
contract is no longer onerous.
Foreign currency
61 When applying IAS 21 The Effects of Changes in Foreign Exchange Rates to an
insurance contract that results in cash flows in a foreign currency, the
insurer shall treat the contract as a monetary item. This requirement
applies not only to the present value of the fulfilment cash flows, but also
to the residual margin. That requirement also applies to the pre-claims
liability of short-duration contracts measured in accordance with
paragraphs 56–60.
Financial instruments that contain discretionary
participation features
62 As specified in paragraph 2(b), this [draft] IFRS applies to financial
instruments that contain a discretionary participation feature.
63 Such financial instruments do not transfer significant insurance risk.
Therefore, some of the requirements in this [draft] IFRS are modified as
described in paragraphs 64 and 65 when applied to those financial
instruments.
64 Paragraph 27 defines the boundary of an insurance contract. Instead, the
boundary of a financial instrument with a discretionary participation
feature is the point at which the contract holder no longer has a
contractual right to receive benefits arising from the discretionary
participating feature in that contract.
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65 Paragraph 50 describes the basis for the release of the residual margin.
Instead, the residual margin for an financial instrument with a
discretionary participation feature shall be recognised as income in profit
or loss over the life of the contract in a systematic way that best reflects
the asset management services, as follows:
(a) on the basis of the passage of time, but
(b) on the basis of the fair value of assets under management, if that
pattern differs significantly from the passage of time.
66 Other requirements of this [draft] IFRS apply equally to a financial
instrument with a discretionary participation feature, even though those
contracts do not transfer significant insurance risk. For example, the
cash flows arising from those financial instruments may be subject to
uncertainty as a result of risks other than insurance risk (eg lapse risk and
expense risk). If those risks are material, the present value of the
fulfilment cash flows shall include a risk adjustment to reflect the risk
that the ultimate cash flows may exceed those expected. But because
financial instruments with discretionary participation features contracts
do not transfer significant insurance risk, the application of some of the
requirements in this [draft] IFRS may not be relevant or may not have a
material effect.
Derecognition
67 An insurer shall remove an insurance contract liability (or a part of an
insurance contract liability) from its statement of financial position
when, and only when, it is extinguished—ie when the obligation specified
in the insurance contract is discharged or cancelled or expires. At that
point, the insurer is no longer at risk and is therefore no longer required
to transfer any economic resources to satisfy the insurance obligation.
68 When a cedant buys reinsurance, it shall derecognise the underlying
contract or contracts only if that contract or those contracts are
extinguished.
Presentation
Statement of financial position
69 An insurer shall present each portfolio of insurance contracts as a single
item within insurance contract assets or insurance contract liabilities.
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70 An insurer shall not offset reinsurance assets against insurance contract
liabilities.
71 An insurer shall present:
(a) the pool of assets underlying unit-linked contracts as a single line
item, and not commingle it with the insurer’s other assets.
(b) the portion of the liabilities from unit-linked contracts linked to the
pool of assets in (a) as a single line item and not commingle it with
the insurer’s other insurance contract liabilities.
Statement of comprehensive income
72 At a minimum, an insurer shall include for insurance contract line items
in its statement of comprehensive income that present the following
amounts for the period:
(a) underwriting margin, disaggregated either in the statement of
comprehensive income or in the notes into:
(i) the change in risk adjustment.
(ii) the release of residual margin.
(b) gains and losses at initial recognition, disaggregated either in the
statement of comprehensive income or in the notes into:
(i) losses on insurance contracts acquired in a portfolio transfer
(see paragraph 40(b)).
(ii) gains on reinsurance contracts bought by a cedant
(see paragraph 45(b)).
(iii) losses at initial recognition of an insurance contract
(see paragraph 18).
(c) acquisition costs that are not incremental at the level of an
individual contract (see paragraph 39(b)).
(d) experience adjustments and changes in estimates, disaggregated
either in the statement of comprehensive income or in the notes
into:
(i) differences between actual cash flows and previous estimates
of those cash flows (ie experience adjustments).
(ii) changes in estimates of cash flows and changes in discount
rates.
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(iii) impairment losses on reinsurance assets.
(e) interest on insurance contract liabilities.
73 The changes in estimates of discount rates and the interest on insurance
liabilities shall be presented or disclosed in a way that highlights their
relationship with the investment return on the assets backing those
liabilities.
74 An insurer shall not present in the statement of comprehensive income,
except as noted in paragraph 75(a):
(a) premiums, which instead are treated in the same way as deposit
receipts; and
(b) claims expenses, claims handling expenses, incremental
acquisition costs and other expenses included in the measurement
of the insurance contract, which instead are treated in the same
way as repayments of deposits.
75 For some short-duration contracts, the pre-claims liability is measured in
accordance with paragraphs 56–60. For those contracts, an insurer shall,
in addition to the applicable line items in paragraph 72, include in its
statement of comprehensive income line items that present the following
amounts from insurance contracts for the period:
(a) the underwriting margin, disaggregated either in the statement of
comprehensive income or in the notes into:
(i) premium revenue, determined as the gross release of the
pre-claims obligation (ie grossed-up for the amortisation of
incremental acquisition costs, see paragraph 57(a)).
(ii) claims incurred.
(iii) expenses incurred.
(iv) amortisation of incremental acquisition costs included in the
pre-claims obligation (see paragraph 57(b)).
(b) changes in additional liabilities for onerous contracts (see
paragraph 60).
76 An entity shall present all income and expense from insurance contracts
in profit or loss.
77 An insurer shall not offset income or expense from reinsurance contracts
against the expense or income from insurance contracts.
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78 An insurer shall present income and expense from:
(a) unit-linked contracts as a single line item, and not commingle them
with income and expense from the insurer’s other insurance
contract liabilities.
(b) the pool of assets underlying unit-linked contracts as a single line
item, and not commingle them with income or expense from the
insurer’s other assets.
Disclosure
79 To help users of financial statements understand the amount, timing and
uncertainty of future cash flows arising from insurance contracts, an
insurer shall disclose qualitative and quantitative information about:
(a) the amounts recognised in its financial statements arising from
insurance contracts (see paragraphs 85–90); and
(b) the nature and extent of risks arising from insurance contracts
(see paragraphs 91–97).
80 If the disclosures required by this [draft] IFRS and other IFRSs do not meet
that objective in a particular situation, an insurer shall disclose whatever
additional information is necessary to meet that objective.
81 An insurer shall consider the level of detail necessary to satisfy the
disclosure requirements and how much emphasis to place on each of the
various requirements. An insurer shall aggregate or disaggregate
information so that useful information is not obscured by either the
inclusion of a large amount of insignificant detail or the aggregation of
items that have different characteristics.
82 An insurer shall provide sufficient information to permit reconciliation
to the line items presented in the statement of financial position.
83 The disclosures required in this [draft] IFRS shall not aggregate
information relating to different reportable segments, as defined in
IFRS 8 Operating Segments.
84 Examples of aggregation levels that might be appropriate are:
(a) type of contract.
(b) geography (eg country or region).
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Explanation of recognised amounts
85 An insurer shall disclose information about the amounts recognised in its
financial statements in sufficient detail to help users of its financial
statements evaluate the timing, amount and uncertainty of future cash
flows arising from insurance contracts, including:
(a) reconciliation from the opening to the closing aggregate contract
balances (see paragraphs 86–89).
(b) the methods and inputs used to develop the measurements
(see paragraph 90).
Reconciliation of contract balances
86 To comply with paragraph 85(a), an insurer shall disclose a reconciliation
from the opening to the closing balance of each of the following, if
applicable:
(a) insurance contract liabilities and, separately, insurance contract
assets.
(b) risk adjustments included in (a).
(c) residual margins included in (a).
(d) reinsurance assets arising from reinsurance contracts held by the
insurer as cedant.
(e) risk adjustments included in (d).
(f) residual margins included in (d).
(g) impairment losses on reinsurance assets.
87 For each reconciliation required by paragraph 86, an insurer shall show,
at a minimum, each of the following, if applicable:
(a) the carrying amounts at the beginning and end of the period.
(b) new contracts recognised during the period.
(c) premiums received.
(d) payments, with separate disclosure of:
(i) claims and benefits.
(ii) expenses.
(iii) incremental acquisition costs.
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(e) other cash paid and, separately, other cash received.
(f) income and expense, reconciled to the amounts disclosed to
comply with paragraphs 72 and 75.
(g) amounts relating to contracts acquired from, or transferred to,
other insurers in portfolio transfers or business combinations.
(h) net exchange differences arising on the translation of foreign
currency amounts into the presentation currency.
88 For short-duration contracts measured using the measurement described
in paragraphs 54–60, an insurer shall disclose the reconciliation required
by paragraph 86 separately for:
(a) pre-claims liabilities.
(b) additional liabilities for onerous insurance contracts.
(c) claims liabilities.
89 For those contracts for which uncertainty about the amount and timing
of claims payments is not typically resolved fully within one year, an
insurer shall disclose the claims and expenses incurred during the period.
Methods and inputs used to develop the measurements
90 To comply with paragraph 85(b), an insurer shall disclose:
(a) for the measurements that have the most material effect on the
recognised amounts arising from insurance contracts, the methods
used and the processes for estimating the inputs to those methods.
When practicable, the insurer shall also provide quantitative
information about those inputs.
(b) to the extent not covered in (a), the methods and inputs used to
estimate:
(i) the risk adjustment, including information about the
confidence level to which the risk adjustment corresponds.
If the insurer uses a conditional tail expectation technique or
a cost of capital technique, it shall disclose the confidence
level to which the risk adjustment estimated under those
methods corresponds (eg that the risk adjustment was
estimated at conditional tail expectation (Y) and corresponds
to a confidence level of Z per cent).
(ii) discount rates.
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(iii) estimates of policyholder dividends.
(c) the effect of changes in the inputs used to measure insurance
contracts, showing separately the effect of each change that has a
material effect on the financial statements.
(d) a measurement uncertainty analysis of the inputs that have a
material effect on the measurement. If changing one or more
inputs used in the measurement to a different amount that could
have reasonably been used in the circumstances would have
resulted in a materially higher or lower measurement, the insurer
shall disclose the effect of using those different amounts and how
it calculated that effect. When preparing a measurement
uncertainty analysis, an insurer shall not take into account inputs
that are associated with remote scenarios. An insurer shall take
into account the effect of correlation between inputs if such
correlation is relevant when estimating the effect on the
measurement of using those different amounts. For that purpose,
materiality shall be judged with respect to profit or loss, and total
assets or total liabilities.
Nature and extent of risks arising from insurance
contracts
91 An insurer shall disclose information about the nature and extent of risks
arising from insurance contracts in sufficient detail to help users of
financial statements evaluate the amount, timing and uncertainty of
future cash flows arising from insurance contracts.
92 To comply with paragraph 91, an insurer shall disclose:
(a) the exposures to risks and how they arise.
(b) its objectives, policies and processes for managing risks arising
from insurance contracts and the methods used to manage those
risks.
(c) any changes in (a) or (b) from the previous period.
(d) information about the effect of the regulatory frameworks in
which the insurer operates, for example minimum capital
requirements or required interest rate guarantees.
(e) information about insurance risk on a gross and net basis, before
and after risk mitigation (eg by reinsurance) including information
about:
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(i) the sensitivity to insurance risk in relation to its effect on
profit or loss and equity. This shall be disclosed by a
sensitivity analysis that shows any material effect on profit or
loss and equity that would have resulted from:
(A) changes in the relevant risk variable that were
reasonably possible at the end of the reporting period;
(B) the methods and inputs used in preparing the
sensitivity analysis; and
(C) any changes from the previous period in the methods
and inputs used.
However, if an insurer uses an alternative method to manage
sensitivity to market conditions, such as embedded value or
value at risk, it can meet this requirement by disclosing that
alternative sensitivity analysis.
(ii) concentrations of insurance risk, including a description of
how management determines concentrations and a
description of the shared characteristic that identifies each
concentration (eg type of insured event, geographical area or
currency). Concentrations of insurance risk can arise if an
insurer has, for example:
(A) underwritten risks concentrated in one geographical
area or one industry.
(B) underwritten risks that are also present in its
investment portfolio, for example if an insurer
provides product liability protection to
pharmaceutical companies and also holds
investments in those companies.
(iii) actual claims compared with previous estimates of the
undiscounted amount of the claims (ie claims development).
The disclosure about claims development shall go back to the
period when the earliest material claim arose for which there
is uncertainty about the amount and timing of the claims
payments, but need not go back more than ten years.
An insurer need not disclose information about the
development of claims for which uncertainty about the
amount and timing of claims payments is typically resolved
within one year. An insurer shall reconcile the disclosure
about claims development with the carrying amount of the
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insurance contract liabilities recognised in the statement of
financial position.
93 For each type of risk, other than insurance risk, arising from insurance
contracts, an insurer shall disclose:
(a) summary quantitative information about its exposure to that risk
at the end of the reporting period. This disclosure shall be based
on the information provided internally to the key management
personnel of the insurer and shall provide information about the
risk management techniques and methodologies applied by the
insurer.
(b) concentrations of risk if not apparent from other disclosures. Such
concentrations can arise from, for example, interest rate
guarantees that come into effect at the same level for an entire
book of business.
94 With regard to credit risk arising from reinsurance contracts and, if
applicable, other insurance contracts, an insurer shall disclose:
(a) the amount that best represents its maximum exposure to credit
risk at the end of the reporting period.
(b) information about the credit quality of reinsurance assets.
95 With regard to liquidity risk, an insurer shall disclose:
(a) either a maturity analysis that shows the remaining contractual
maturities or information about the estimated timing of the net
cash outflows resulting from recognised insurance liabilities. This
may take the form of an analysis, by estimated timing, of the
amounts recognised in the statement of financial position.
(b) a description of how it manages the liquidity risk resulting from its
insurance liabilities.
96 With regard to market risk (as defined in IFRS 7) an insurer shall disclose:
(a) a sensitivity analysis for each type of market risk to which the
insurer is exposed at the end of the reporting period, showing how
profit or loss and equity would have been affected by changes in
the relevant risk variable that were reasonably possible at that
date; if an insurer uses an alternative method to manage sensitivity
to market conditions, such as an embedded value analysis, or a
sensitivity analysis, such as value at risk, that reflects
interdependencies between risk variables and uses it to manage
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financial risks, it may use that sensitivity analysis to meet this
requirement.
(b) an explanation of the methods and main inputs used in preparing
the sensitivity analysis.
(c) an explanation of the objective of the methods used and of
limitations that may result in the information not fully reflecting
the carrying amount of the insurance contracts involved.
(d) changes from the previous period in the methods and inputs used
and the reasons for such changes.
(e) information about exposures to market risk arising from
embedded derivatives contained in a host insurance contract,
including information about the levels at which these exposures
begin to have a material effect on the insurer’s cash flows.
97 If the quantitative information about the insurer’s exposure to risk at the
end of the reporting period is not representative of its exposure to risk
during the period, it shall disclose that fact, the reasons for those
conclusions and shall provide further information that is representative
of the exposure during the period.
Effective date and transition
98 The transition requirements in paragraphs 99–102 apply both to an
insurer that applies IFRSs when it first applies this [draft] IFRS and to an
insurer that applies IFRSs for the first time (a first-time adopter).
99 An insurer shall apply this [draft] IFRS for annual periods beginning on or
after [date to be inserted after exposure]. If an insurer applies this [draft]
IFRS for an earlier period, it shall disclose that fact.
100 At the beginning of the earliest period presented, an insurer shall, with a
corresponding adjustment to retained earnings:
(a) measure each portfolio of insurance contracts at the present value
of the fulfilment cash flows. It follows that for insurance contracts
to which these transitional provisions are applied, the
measurement, both at transition and subsequently, does not
include a residual margin.
(b) derecognise any existing balances of deferred acquisition costs.
(c) derecognise any intangible assets arising from insurance contracts
assumed in previously recognised business combinations. That
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adjustment does not affect intangible assets, such as customer
relationships and customer lists, which relate to possible future
contracts.
Disclosure
101 In applying paragraph 92(e)(iii), an insurer need not disclose previously
unpublished information about claims development that occurred
earlier than five years before the end of the first financial year in which
it first applies this [draft] IFRS. Furthermore, if it is impracticable when
an insurer first applies this [draft] IFRS to prepare information about
claims development that occurred before the beginning of the earliest
period for which the insurer presents full comparative information that
complies with this [draft] IFRS, it shall disclose that fact.
Redesignation of financial assets
102 At the beginning of the earliest period presented, when an insurer first
applies this [draft] IFRS, it is permitted, but not required, to redesignate a
financial asset as measured at fair value through profit or loss if doing so
would eliminate or significantly reduce an inconsistency in
measurement or recognition. The reclassification is a change in
accounting policy and IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors applies. The insurer shall recognise the cumulative
effect of that redesignation as an adjustment to opening retained
earnings of the earliest period presented and remove any related balances
from accumulated other comprehensive income.
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Appendix A
Defined terms
This appendix is an integral part of the [draft] IFRS.
acquisition costs The direct and indirect costs of selling, underwriting and
initiating an insurance contract.
cedant The policyholder under a reinsurance contract.
claims handling
period
The period during which the insurer investigates and pays
claims.
claims liability The liability to pay valid claims for insured events that have
already occurred, including claims incurred but not
reported (IBNR).
coverage period The period during which the insurer provides coverage for
insured events.
direct insurance
contract
An insurance contract that is not a reinsurance contract.
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discretionary
participation
feature
A contractual right to receive, as a supplement to
guaranteed benefits, additional benefits:
(a) that are likely to be a significant portion of the total
contractual benefits;
(b) whose amount or timing is contractually at the
discretion of the issuer; and
(c) that are contractually based on:
(i) the performance of a specified pool of
insurance contracts or a specified type of
insurance contract;
(ii) realised and/or unrealised investment returns
on a specified pool of assets held by the issuer;
or
(iii) the profit or loss of the company, fund or other
entity that issues the contract,
provided that there also exist insurance contracts
that provide similar contractual rights to participate
in the performance of the same insurance contracts,
the same pool of assets or the profit or loss of the
same company, fund or other entity.
financial risk The risk of a possible future change in one or more of a
specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index or other variable,
provided in the case of a non-financial variable that the
variable is not specific to a party to the contract.
guaranteed
benefits
Payments or other benefits to which a particular
policyholder or investor has an unconditional right that is
not subject to the contractual discretion of the issuer.
incremental
acquisition costs
The costs of selling, underwriting and initiating an
insurance contract that would not have been incurred if the
insurer had not issued that particular contract, but no
other direct and indirect costs.
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insurance
contract
A contract under which one party (the insurer) accepts
significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder
if a specified uncertain future event (the insured event)
adversely affects the policyholder. (See Appendix B for
guidance on this definition.)
insurance
contract asset
An insurer’s net remaining contractual rights less
obligations under an insurance contract, if the rights
exceed the obligations.
insurance
contract liability
An insurer’s net remaining contractual obligations less
rights under an insurance contract, if the obligations
exceed the rights.
insurance risk Risk, other than financial risk, transferred from the holder
of a contract to the issuer.
insured event An uncertain future event that is covered by an insurance
contract and creates insurance risk.
insurer The party that has an obligation under an insurance
contract to compensate a policyholder if an insured event
occurs.
policyholder A party that has a right to compensation under an
insurance contract if an insured event occurs.
portfolio of
insurance
contracts
Insurance contracts that are subject to broadly similar
risks and managed together as a single pool.
pre-claims
liability
An insurer’s stand-ready obligation to pay valid claims for
future insured events arising under existing contracts
(ie the obligation relating to the unexpired portion of risk
coverage).
present value of
the fulfilment
cash flows
The expected present value of the future cash outflows less
future cash inflows that will arise as the insurer fulfils the
insurance contract, adjusted for the effects of uncertainty
about the amount and timing of those future cash flows.
reinsurance
assets
A cedant’s net contractual rights under a reinsurance
contract.
reinsurance
contract
An insurance contract issued by one insurer (the reinsurer)
to compensate another insurer (the cedant) for losses on
one or more contracts issued by the cedant.
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reinsurer The party that has an obligation under a reinsurance
contract to compensate a cedant if an insured event occurs.
risk adjustment An adjustment to the expected present value of future cash
flows, to capture the effect of uncertainty about the
amount and timing of those cash flows.
unbundle Account for the components of a contract as if they were
separate contracts, according to their nature.
unit-linked
contract
A contract for which some or all of the benefits are
determined by the price of units in an internal or external
investment fund (ie a specified pool of assets held by the
insurer or a third party and operated in a manner similar
to a mutual fund). In some jurisdictions referred to as a
variable contract.
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Appendix B
Application guidance
This appendix is an integral part of the [draft] IFRS.
B1 This appendix provides guidance on the following issues:
(a) definition of an insurance contract (paragraphs B2–B33).
(b) measurement of an insurance contract (paragraphs B34–B110).
Definition of an insurance contract (paragraph 7 and
Appendix A)
B2 This section provides guidance on the definition of an insurance contract
as specified in Appendix A. It addresses the following:
(a) the term ‘uncertain future event’ (paragraphs B3–B5).
(b) payments in kind (paragraphs B6 and B7).
(c) insurance risk and other risks (paragraphs B8–B17).
(d) examples of insurance contracts (paragraphs B18–B22).
(e) significant insurance risk (paragraphs B23–B31).
(f) changes in the level of insurance risk (paragraphs B32 and B33).
Uncertain future event
B3 Uncertainty (or risk) is the essence of an insurance contract. Accordingly,
at least one of the following is uncertain at the inception of an insurance
contract:
(a) whether an insured event will occur;
(b) when it will occur; or
(c) how much the insurer will need to pay if it occurs.
B4 In some insurance contracts, the insured event is the discovery of a loss
during the term of the contract, even if the loss arises from an event that
occurred before the inception of the contract. In other insurance
contracts, the insured event is an event that occurs during the term of the
contract, even if the resulting loss is discovered after the end of the
contract term.
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B5 Some insurance contracts cover events that have already occurred, but
whose financial effect is still uncertain. An example is a reinsurance
contract that covers the direct insurer against adverse development of
claims already reported by policyholders. In such contracts, the insured
event is the discovery of the ultimate cost of those claims.
Payments in kind
B6 Some insurance contracts require or permit payments to be made in kind,
in which case the insurer provides goods or services to the policyholder to
settle its obligation to compensate the policyholder for insured events.
An example is when the insurer replaces a stolen article directly, instead
of reimbursing the policyholder for the amount of its loss. Another
example is when an insurer uses its own hospitals and medical staff to
provide medical services covered by the insurance contract.
B7 For some fixed-fee service contracts, the level of service depends on an
uncertain event. Although such contracts meet the definition of an
insurance contract if the uncertain event would cause significant
additional payments by the insurer, they are outside the scope of this
[draft] IFRS if the primary purpose of the contract is the provision of
services. Examples of such contracts are:
(a) a maintenance contract in which the service provider agrees to
repair specified equipment after a malfunction.
(b) a contract for car breakdown services in which the provider agrees,
for a fixed annual fee, to provide roadside assistance or tow the car
to a nearby garage.
Distinction between insurance risk and other risks
B8 The definition of an insurance contract refers to insurance risk, which
this [draft] IFRS defines as risk, other than financial risk, transferred from
the holder of a contract to the issuer. A contract that exposes the issuer
to financial risk without significant insurance risk is not an insurance
contract.
B9 The definition of financial risk in Appendix A includes a list of financial
and non-financial variables. That list includes non-financial variables
that are not specific to a party to the contract, such as an index of
earthquake losses in a particular region or an index of temperatures in a
particular city. It excludes non-financial variables that are specific to a
party to the contract, such as the occurrence or non-occurrence of a fire
that damages or destroys an asset of that party. Furthermore, the risk of
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changes in the fair value of a non-financial asset is not a financial risk if
the fair value reflects not only changes in market prices for such assets
(ie a financial variable), but also the condition of a specific non-financial
asset held by a party to a contract (ie a non-financial variable).
For example, if a guarantee of the residual value of a specific car exposes
the guarantor to the risk of changes in the car’s physical condition, that
risk is insurance risk, not financial risk.
B10 Some contracts expose the issuer to financial risk, in addition to
significant insurance risk. For example, many life insurance contracts
both guarantee a minimum rate of return to policyholders (creating
financial risk) and promise death benefits that at some times
significantly exceed the policyholder’s account balance (creating
insurance risk in the form of mortality risk). Such contracts are
insurance contracts.
B11 Under some contracts, an insured event triggers the payment of an
amount linked to a price index. Such contracts are insurance contracts,
provided that the payment that is contingent on the insured event could
be significant. For example, a life-contingent annuity linked to a
cost-of-living index transfers insurance risk because payment is triggered
by an uncertain event—the survival of the annuitant. The link to the price
index is an embedded derivative, but it also transfers insurance risk.
If the resulting transfer of insurance risk is significant, the embedded
derivative meets the definition of an insurance contract, in which case it
shall not be separated from the host contract (see paragraph 12).
B12 The definition of insurance risk refers to risk that the insurer accepts
from the policyholder. In other words, insurance risk is a pre-existing risk
transferred from the policyholder to the insurer. Thus, a new risk created
by the contract is not insurance risk.
B13 The definition of an insurance contract refers to an adverse effect on the
policyholder. The definition does not limit the payment by the insurer to
an amount equal to the financial effect of the adverse event. For example,
the definition does not exclude ‘new-for-old’ coverage that pays the
policyholder sufficient to permit replacement of a used and damaged
asset with a new asset. Similarly, the definition does not limit payment
under a term life insurance contract to the financial loss suffered by the
deceased’s dependants, nor does it preclude the payment of
predetermined amounts to quantify the loss caused by death or an
accident.
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B14 Some contracts require a payment if a specified uncertain event occurs,
but do not require there to be an adverse effect on the policyholder as a
precondition for payment. Such a contract is not an insurance contract
even if the holder uses that contract to mitigate an underlying risk
exposure. For example, if the holder uses a derivative to hedge an
underlying non-financial variable that is correlated with the cash flows
from an asset of the entity, the derivative is not an insurance contract
because payment is not conditional on whether the holder is adversely
affected by a reduction in the cash flows from the asset. Conversely, the
definition of an insurance contract refers to an uncertain event for which
an adverse effect on the policyholder is a contractual precondition for
payment. That contractual precondition does not require the insurer to
investigate whether the event actually caused an adverse effect, but it
does permit the insurer to deny payment if it is not satisfied that the
event caused an adverse effect.
B15 Lapse or persistency risk (ie the risk that the counterparty will cancel the
contract earlier or later than the issuer had expected when pricing the
contract) is not insurance risk because the payment to the counterparty
is not contingent on an uncertain future event that adversely affects the
counterparty. Similarly, expense risk (ie the risk of unexpected increases
in the administrative costs associated with the servicing of a contract,
rather than in costs associated with insured events) is not insurance risk
because an unexpected increase in expenses does not adversely affect the
counterparty.
B16 Therefore, a contract that exposes the issuer to lapse risk, persistency risk
or expense risk is not an insurance contract unless that contract also
exposes the issuer to significant insurance risk. However, if the issuer of
that contract mitigates that risk by using a second contract to transfer
part of that risk to another party, the second contract exposes that other
party to insurance risk.
B17 An insurer can accept significant insurance risk from the policyholder
only if the insurer is an entity separate from the policyholder. In the case
of a mutual insurer, the mutual entity accepts risk from each
policyholder and pools that risk. Although policyholders bear that
pooled risk collectively in their capacity as owners, the mutual entity has
accepted the risk that is the essence of insurance contracts.
Examples of insurance contracts
B18 The following are examples of contracts that are insurance contracts, if
the transfer of insurance risk is significant:
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(a) insurance against theft or damage to property.
(b) insurance against product liability, professional liability, civil
liability or legal expenses.
(c) life insurance and prepaid funeral plans (although death is certain,
it is uncertain when death will occur or, for some types of life
insurance, whether death will occur within the period covered by
the insurance).
(d) life-contingent annuities and pensions (ie contracts that provide
compensation for the uncertain future event—the survival of the
annuitant or pensioner—to assist the annuitant or pensioner in
maintaining a given standard of living, which would otherwise be
adversely affected by his or her survival).
(e) insurance against disability and medical cost.
(f) surety bonds, fidelity bonds, performance bonds and bid bonds
(ie contracts that compensate the holder if another party fails to
perform a contractual obligation, for example an obligation to
construct a building).
(g) credit insurance that provides for specified payments to be made to
reimburse the holder for a loss it incurs because a specified debtor
fails to make payment when due under the original or modified
terms of a debt instrument.
(h) product warranties. Product warranties issued by another party for
goods sold by a manufacturer, dealer or retailer are within the
scope of this [draft] IFRS. However, product warranties issued
directly by a manufacturer, dealer or retailer are within the scope
of IAS 18 and IAS 37 because they either:
(i) do not meet the definition of an insurance contract
(warranties intended to provide a customer with coverage for
latent defects in the product); or
(ii) meet the definition of an insurance contract but are outside
the scope of this [draft] IFRS (warranties intended to provide a
customer with coverage for faults that arise after the product
is transferred to the customer).
(i) title insurance (ie insurance against the discovery of defects in title
to land that were not apparent when the insurance contract was
issued). In this case, the insured event is the discovery of a defect in
the title, not the defect itself.
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(j) travel insurance (ie compensation in cash or in kind to
policyholders for losses suffered during travel).
(k) catastrophe bonds that provide for reduced payments of principal,
interest or both if a specified event adversely affects the issuer of
the bond (unless the specified event does not create significant
insurance risk, for example if the event is a change in an interest
rate or foreign exchange rate).
(l) insurance swaps and other contracts that require a payment based
on changes in climatic, geological or other physical variables that
are specific to a party to the contract.
(m) reinsurance contracts.
B19 The following are examples of items that are not insurance contracts:
(a) investment contracts that have the legal form of an insurance
contract but do not expose the insurer to significant insurance
risk. For example, life insurance contracts in which the insurer
bears no significant mortality risk are not insurance contracts
(such contracts are non-insurance financial instruments or service
contracts—see paragraphs B20 and B21).
(b) contracts that have the legal form of insurance, but pass all
significant insurance risk back to the policyholder through
non-cancellable and enforceable mechanisms that adjust future
payments by the policyholder to the issuer as a direct result of
insured losses. For example, some financial reinsurance contracts
or some group contracts pass all significant insurance risk back to
the policyholder (such contracts are normally non-insurance
financial instruments or service contracts—see paragraphs B20 and
B21).
(c) self-insurance (ie retaining a risk that could have been covered by
insurance). In such situations, there is no insurance contract
because there is no agreement with another party.
(d) contracts (such as gambling contracts) that require a payment if a
specified uncertain future event occurs, but do not require, as a
contractual precondition for payment, that the event adversely
affects the policyholder. However, this does not preclude the
specification of a predetermined payout to quantify the loss caused
by a specified event such as death or an accident (see paragraph
B13).
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(e) derivatives that expose one party to financial risk but not
insurance risk, because they require that party to make payment
solely on the basis of changes in one or more of a specified interest
rate, financial instrument price, commodity price, foreign
exchange rate, index of prices or rates, credit rating or credit index
or other variable, provided in the case of a non-financial variable
that the variable is not specific to a party to the contract (such
contracts are accounted for in accordance with IFRS 9 or IAS 39).
(f) credit-related guarantees (or letters of credit, credit derivative
default contracts or credit insurance contracts) that require
payments even if the holder has not incurred a loss on the failure
of the debtor to make payments when due (such contracts are
accounted for in accordance with IFRS 9 or IAS 39).
(g) contracts that require a payment based on a climatic, geological or
other physical variable that is not specific to a party to the contract
(commonly described as weather derivatives).
(h) catastrophe bonds that provide for reduced payments of principal,
interest or both, based on a climatic, geological or other physical
variable that is not specific to a party to the contract.
B20 If the contracts described in paragraph B19 create financial assets or
financial liabilities, they are within the scope of IFRS 9 or IAS 39. Among
other things, this means that the parties to the contract use what is
sometimes called deposit accounting, which involves the following:
(a) one party recognises the consideration received as a financial
liability, rather than as revenue; and
(b) the other party recognises the consideration paid as a financial
asset, rather than as an expense.
B21 If the contracts described in paragraph B19 do not create financial assets
or financial liabilities, IAS 18 applies. In accordance with IAS 18, revenue
associated with a transaction involving the rendering of services is
recognised as an entity satisfies its performance obligation by providing
the services to the customer.
B22 The credit insurance discussed in paragraph B18(g) and the credit-related
guarantees discussed in paragraph B19(f) can have various legal forms,
such as that of a guarantee, some types of letter of credit, a credit default
contract or an insurance contract. If those contracts require the issuer to
make specified payments to reimburse the holder for a loss the holder
incurs because a specified debtor fails to make payment when due in
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accordance with the original or modified terms of a debt instrument,
they are insurance contracts and are within the scope of this [draft] IFRS.
However, IFRS 9 or IAS 39 apply to contracts described in paragraph
B19(f), such as contracts that require payment:
(a) regardless of whether the counterparty holds the underlying debt
instrument; or
(b) on a change in credit rating or change in credit index, rather than
on the failure of a specified debtor to make payments when due.
Significant insurance risk
B23 A contract is an insurance contract only if it transfers significant
insurance risk. Paragraphs B8–B22 discuss insurance risk. The following
paragraphs discuss the assessment of whether insurance risk is
significant.
B24 Insurance risk is significant if, and only if, an insured event could cause
an insurer to pay significant additional benefits in any scenario,
excluding scenarios that lack commercial substance (ie have no
discernible effect on the economics of the transaction). If significant
additional benefits would be payable in scenarios that have commercial
substance, the condition in the previous sentence can be met even if the
insured event is extremely unlikely or even if the expected
(ie probability-weighted) present value of contingent cash flows is a small
proportion of the expected present value of all the remaining cash flows
from the insurance contract.
B25 In addition, a contract does not transfer insurance risk if there is no
scenario that has commercial substance in which the present value of the
net cash outflows paid by the insurer can exceed the present value of the
premiums.
B26 In determining whether it will pay significant additional benefits in a
particular scenario, the insurer takes into account the effect of the time
value of money. As a result, contractual terms that delay timely
reimbursement to the policyholder can eliminate significant insurance
risk. Consider the following reinsurance example. A cedant enters into a
contract covering a book of one-year contracts. The contract provides that
the reinsurer’s payment will be ten years after the start of the contract.
At the beginning of the contract, the reinsurer expects that claims will
range from CU1,000 to CU1,200.* In assessing whether the reinsurance
* In this [draft] IFRS, monetary amounts are denominated in ‘currency units (CU)’.
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contract transfers significant insurance risk, the reinsurer considers the
present value of the future payments in each scenario, ie not their
nominal amounts. Assuming a discount rate of 5 per cent, the relevant
benefit payments range from CU614 to CU737 (ie the nominal payments
discounted at a rate of 5 per cent over 10 years).
B27 The additional benefits described in paragraph B24 refer to the present
value of amounts that exceed the present value of amounts that would be
payable if no insured event occurred (excluding scenarios that lack
commercial substance). Those additional amounts include claims
handling and claims assessment costs, but exclude:
(a) the loss of the ability to charge the policyholder for future services.
For example, in an investment-linked life insurance contract, the
death of the policyholder means that the insurer can no longer
perform investment management services and collect a fee for
doing so. However, this economic loss for the insurer does not
reflect insurance risk, just as a mutual fund manager does not take
on insurance risk in relation to the possible death of a client.
Therefore, the potential loss of future investment management
fees is not relevant in assessing how much insurance risk is
transferred by a contract.
(b) waiver on death of charges that would be made on cancellation or
surrender. Because the contract brought those charges into
existence, the waiver of these charges does not compensate the
policyholder for a pre-existing risk. Hence, they are not relevant in
assessing how much insurance risk is transferred by a contract.
(c) a payment conditional on an event that does not cause a
significant loss to the holder of the contract. For example, consider
a contract that requires the issuer to pay CU1 million if an asset
suffers physical damage causing an insignificant economic loss of
CU1 to the holder. In this contract, the holder transfers to the
insurer the insignificant risk of losing CU1. At the same time, the
contract creates non-insurance risk that the issuer will need to pay
CU999,999 if the specified event occurs. Because the issuer does
not accept significant insurance risk from the holder, this contract
is not an insurance contract.
(d) possible reinsurance recoveries. The insurer accounts for these
separately.
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B28 An insurer shall assess the significance of insurance risk contract by
contract, rather than by reference to materiality to the financial
statements (for that purpose, contracts entered into simultaneously with
a single counterparty, or contracts that are otherwise interdependent,
form a single contract). Thus, insurance risk can be significant even if
there is a minimal probability of material losses for a whole book of
contracts. This contract-by-contract assessment makes it easier to classify
a contract as an insurance contract. However, if a relatively
homogeneous book of small contracts is known to consist of contracts
that all transfer insurance risk, an insurer need not examine each
contract within that book to identify a few non-derivative contracts that
transfer insignificant insurance risk.
B29 It follows from paragraphs B24–B28 that if a contract pays a death benefit
exceeding the amount payable on survival, the contract is an insurance
contract unless the additional death benefit is insignificant (judged by
reference to the contract rather than to an entire book of contracts).
As noted in paragraph B27(b), the waiver on death of cancellation or
surrender charges is not included in this assessment if that waiver does
not compensate the policyholder for a pre-existing risk. Similarly, an
annuity contract that pays out regular sums for the rest of a
policyholder’s life is an insurance contract, unless the aggregate
life-contingent payments are insignificant.
B30 Paragraph B24 refers to additional benefits. Those additional benefits
could include a requirement to pay benefits earlier if the insured event
occurs earlier and the payment is not adjusted for the time value of
money. An example is whole life insurance for a fixed amount
(ie insurance that provides a fixed death benefit whenever the
policyholder dies, with no expiry date for the cover). It is certain that the
policyholder will die, but the date of death is uncertain. The insurer will
suffer a loss on those individual contracts for which policyholders die
early, even if there is no overall loss on the whole book of contracts.
B31 If an insurance contract is unbundled in accordance with paragraph 8
into an insurance component and one or more other components (eg an
investment component), the significance of insurance risk transfer is
assessed by reference to the insurance component. The significance of
insurance risk transferred by an embedded derivative is assessed by
reference to the embedded derivative.
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Changes in the level of insurance risk
B32 Some contracts do not transfer any insurance risk to the issuer at
inception, although they do transfer insurance risk at a later time.
For example, consider a contract that provides a specified investment
return and includes an option for the policyholder to use the proceeds of
the investment on maturity to buy a life-contingent annuity at the
annuity rates charged by the insurer to other new annuitants at the time
the policyholder exercises the option. Such a contract transfers no
insurance risk to the issuer until the option is exercised because the
insurer remains free to price the annuity on a basis that reflects the
insurance risk transferred to the insurer at that time. However, if the
contract specifies the annuity rates (or a basis for setting the annuity
rates), the contract transfers insurance risk to the issuer at inception.
B33 A contract that qualifies as an insurance contract remains an insurance
contract until all rights and obligations are extinguished (ie discharged,
or cancelled or expires).
Measurement of insurance contracts
B34 This section provides guidance on the measurement of insurance
contracts. It addresses the following:
(a) initial measurement (paragraph B35).
(b) initial measurement of reinsurance contracts (paragraph B36).
(c) estimates of future cash flows (paragraphs B37–B66).
(d) risk adjustments (paragraphs B67–B103).
(e) insurance contracts acquired in portfolio transfers
(paragraphs B104–B107).
(f) insurance contracts acquired in a business combination
(paragraphs B108 and B109).
(g) measurement of insurance contracts on transition
(paragraph B110).
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Initial measurement (paragraphs 17–46)
B35 Paragraph 17 requires an insurer to measure an insurance contract
initially at the present value of the fulfilment cash flows plus a residual
margin that eliminates any gain at inception of the contract. A residual
margin arises if the expected present value of the future cash outflows
plus the risk adjustment is less than the expected present value of the
future cash inflows. However, if the present value of the fulfilment cash
flows is greater than zero (ie the expected present value of the future cash
outflows plus the risk adjustment exceeds the expected present value of
the future cash inflows), paragraph 18 requires that an expense shall be
recognised immediately. Furthermore, paragraph 39(a) requires an
insurer to include in the present value of fulfilment cash flows those
acquisition costs that are incremental at the level of an individual
contract. The following example illustrates how an insurer applies these
principles.
Example 1 – Initial measurement of insurance contracts
An insurer issues an insurance contract, receives CU50 as the first
premium payment and incurs acquisition costs of CU70, of which
incremental acquisition costs are CU40. The insurer estimates an
expected present value (EPV) of subsequent premiums of CU950 and a
risk adjustment of CU50. In example 1A, the insurer estimates that the
EPV of future claims is CU900. In Example 1B, the insurer estimates
that the EPV of claims is CU920. The present value of the fulfilment
cash flows is the difference between the EPV of cash inflows (CU1,000)
and the EPV of fulfilment cash outflows (CU940 in Example 1A and
CU960 in Example 1B), less the risk adjustment (CU50). At initial
recognition, the insurer would measure the insurance contract as
follows:
Example 1A Example 1B
CU CU
EPV of cash outflows 940 960
Risk adjustment 50 50
EPV of cash inflows (1,000) (1,000)
Present value of the fulfilment cash
flows (10) 10
Residual margin 10 0
Liability at initial recognition 0 10
continued...
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Initial measurement of reinsurance contracts
(paragraphs 43–46)
B36 Paragraph 43 requires a cedant to measure a reinsurance contract
initially at the present value of the fulfilment cash flows plus a residual
margin. A residual margin arises for a reinsurance contract if the
expected present value of the future cash inflows (eg recoveries) plus the
risk adjustment is less than the expected present value of future cash
outflows (eg premium ceded to the reinsurer). However, if the present
value of the fulfilment cash flows is greater than zero (ie the expected
present value of the future cash inflows plus the risk adjustment exceeds
the expected present value of the future cash outflows), paragraph 45(b)
of this [draft] IFRS requires that a gain shall be recognised. The following
example illustrates how a cedant applies these principles.
...continued
The effect on profit or loss will be the
following:
Loss at initial recognition 0 10
Non-incremental acquisition costs
(CU70–CU40) 30 30
Loss 30 40
Immediately after initial recognition, the carrying amount of the
insurance contract liability changes as follows because of the cash
flows (first premium and incremental acquisition costs) arising on the
day of initial recognition (see paragraph 24):
EPV of cash outflows 900 920
Risk adjustment 50 50
Residual margin 10 0
EPV of cash inflows (950) (950)
Liability immediately after initial
recognition 10 20
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Example 2 – Initial measurement of reinsurance contracts
A cedant enters into a 30 per cent proportional reinsurance contract.
At initial recognition of the reinsurance contract, the cedant measures
the corresponding underlying insurance contract, which it issued at
the same moment, as follows:
CU
Single premium (1,000)
Expected present value (EPV) of
claims 870
Incremental acquisition costs 30
Risk adjustment 60
Present value of fulfilment cash flows (40)
Residual margin 40
Liability at initial recognition 0
From the characteristics of the underlying insurance contract, the
cedant estimates the following:
- expected present value (EPV) of cash inflows of CU261 (recovery of
30 per cent of the EPV of claims payable to the policyholder of
CU870 for the underlying insurance liability);
- risk adjustment of CU18 (30 per cent of the risk adjustment of
CU60 for the underlying insurance liability); and
- EPV of cash outflows (the single reinsurance premium paid to the
reinsurer, less ceding commissions received from the reinsurer) of
- in example 2A, CU285;
- in example 2B, CU275.
Assuming that the risk of non-performance by the reinsurer is
negligible, the measurement of the asset arising from the reinsurance
contract would be:
continued...
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Estimates of future cash flows (paragraphs 23–25)
B37 This section addresses:
(a) uncertainty and the expected present value approach (paragraphs
B38–B41).
(b) market variables and non-market variables (paragraphs B42–B52).
(c) source of estimates (paragraph B53).
(d) using current estimates (paragraphs B54–B56).
(e) future events (paragraphs B57–B60).
(f) which cash flows (paragraphs B61–B64).
(g) level of measurement (paragraphs B65 and B66).
Uncertainty and the expected present value approach
B38 The starting point for an estimate of cash flows is a range of scenarios that
reflects the full range of possible outcomes. Each scenario specifies the
amount and timing of the cash flows for a particular outcome, and the
estimated probability of that outcome. The cash flows from each scenario
are discounted and weighted by the estimated probability of that
outcome in order to derive an expected present value. Thus, the aim is
...continued
Example 2A Example 2B
CU CU
EPV of cash inflows (recoveries) 261 261
Risk adjustment 18 18
EPV of cash outflows (premium ceded) (285) (275)
Present value of the fulfilment cash
flows (6) 4
Residual margin 6 0
Asset at initial recognition 0 4
The effect on profit or loss will be the following:
Gain at initial recognition 0 4
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not to develop a single ‘best’ estimate of future cash flows, but, in
principle, to identify all possible scenarios and make unbiased estimates
of the probability of each scenario. In some cases, an insurer has access
to considerable data and may be able to develop those cash flow scenarios
easily. But in other cases, the insurer may not be able to develop more
than general statements about the variability of cash flows without
incurring considerable cost. In those cases, the insurer shall use those
general statements in estimating the future cash flows.
B39 When considering all possible scenarios, the objective is not necessarily
to identify every possible scenario but rather to incorporate all relevant
information and not simply ignore data or information that is difficult to
obtain. In practice, it is not always necessary to develop explicit
scenarios. For example, if an insurer estimates that the probability
distribution of outcomes is broadly consistent with a probability
distribution that can be described completely with a small number of
parameters, it will suffice to estimate those parameters. Similarly, in
some cases, relatively simple modelling may give an answer within a
tolerable range of precision, without the need for a large number of
detailed simulations. However, in some cases, the cash flows may be
driven by complex underlying factors and respond in a highly non-linear
fashion to changes in economic conditions (eg if the cash flows reflect a
series of interrelated implicit or explicit options). In such cases, more
sophisticated stochastic modelling is likely to be needed, including the
identification of scenarios that specify the amount and timing of the cash
flows for particular outcomes and the estimated probability of those
outcomes.
B40 The probability assigned to each scenario shall reflect conditions at the
end of the reporting period. For example, there may be a 20 per cent
probability at the end of the reporting period that a major storm will
strike during the remaining six months of an insurance contract. After
the end of the reporting period and before the financial statements are
authorised for issue, a storm strikes. The present value of the fulfilment
cash flows under that contract shall not reflect the storm that, with
hindsight, is known to have occurred. Instead, the cash flows included in
the measurement are multiplied by the 20 per cent probability that was
apparent at the end of the reporting period (with appropriate disclosure
that a non-adjusting event occurred after the end of the reporting period
in accordance with IAS 10 Events after the Reporting Period).
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B41 The scenarios developed shall include unbiased estimates of the
probability of catastrophic losses under existing contracts. However, the
scenarios exclude possible claims under possible future contracts.
For example, suppose there is a 5 per cent probability that an earthquake
during the remaining coverage period of an existing contract will cause
losses with a present value of CU1,000,000. In that case, the expected
present value of the cash outflows includes CU50,000 (ie CU1,000,000 × 5
per cent) for those catastrophe losses. But the expected value of the cash
outflows for that contract does not include the possible catastrophe
losses from an earthquake that could happen after the end of the
coverage period.
Market variables and non-market variables
B42 The cash flows shall reflect the manner in which the insurer expects to
fulfil the contract. A search for market inputs is not required, except for
market variables such as interest rates. Therefore, this application
guidance distinguishes between two types of variables:
(a) market variables—variables that can be observed in, or derived
directly from, markets (eg prices of publicly traded securities and
interest rates).
(b) non-market variables—all other variables (eg the frequency and
severity of insurance claims and mortality).
Market variables
B43 Estimates of market variables shall be consistent with observable market
prices at the end of the reporting period. An insurer shall not substitute
its own estimates for observed market prices.
B44 Market prices blend a range of views about possible future outcomes and
also reflect the risk preferences of market participants. Therefore, they
are not a single point forecast of the future outcome. If the actual
outcome differs from the previous market price, this does not mean that
the market price was ‘wrong’.
B45 An important application of market variables is the notion of a
replicating asset, or a replicating portfolio of assets. A replicating asset
is one whose cash flows exactly match those contractual cash flows in
amount, timing and uncertainty. In some cases, a replicating asset may
exist for some of the cash flows arising from an insurance contract.
The fair value of that asset reflects the expected present value of the cash
flows from the asset, and it also reflects the risk associated with those
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cash flows. If a replicating portfolio of assets exists for some or all of the
cash flows arising from an insurance contract liability, the insurer can for
those contractual cash flows simply include the fair value of those assets
in the present value of the fulfilment cash flows, instead of explicitly
estimating the expected present value of those particular cash flows and
the associated risk adjustment. For cash flows not measured by a
replicating portfolio of assets, an insurer estimates explicitly the
expected present value of those particular cash flows and the associated
risk adjustment.
B46 This [draft] IFRS does not require an insurer to use a replicating portfolio
technique. However, if a replicating asset exists and an insurer uses a
different technique, the insurer shall satisfy itself that a replicating
portfolio technique would be unlikely to lead to a materially different
answer. One way to assess whether that is the case is to verify that
applying the other technique to the cash flows generated by the
replicating portfolio produces a measurement that is not materially
different from the fair value of the replicating portfolio.
B47 As an example of a replicating portfolio technique, suppose an insurance
contract contains a feature that generates cash flows equal to the cash
flows from a put option on a basket of traded assets. The replicating
portfolio for those cash flows would be a put option with the same
features. The insurer would observe or estimate the fair value of that
option and include that amount in the measurement of the entire
insurance contract. However, the insurer could use a technique other
than a replicating portfolio if that technique, in principle, is expected to
achieve the same measurement of the contract as a whole. For example,
other techniques may be more robust or easier to implement if there are
significant interdependencies between the embedded option and other
features of the contract. Judgement is required to determine which
approach best meets the objective in practice in particular circumstances.
Non-market variables
B48 Estimates of non-market variables shall reflect all available evidence,
both external and internal.
B49 Non-market external data (eg national mortality statistics) may have
more or less relevance than internal data (eg internal mortality statistics),
depending on the circumstances. For example, a life insurer shall not rely
solely on national mortality statistics, but shall consider all other
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available internal and external sources of information in developing
unbiased estimates of probabilities for mortality scenarios. In developing
those probabilities, an insurer shall consider all evidence available, giving
more weight to evidence that is more persuasive. For example:
(a) internal mortality statistics may be more persuasive than national
mortality data if the internal statistics are derived from a large
population, the demographic characteristics of the insured
population differ significantly from those of the national
population and the national statistics are out of date; in that case,
an insurer would place more weight on the internal data and less
weight on the national statistics.
(b) conversely, if the internal statistics are derived from a small
population with characteristics believed to be close to those of the
national population, and the national statistics are current, an
insurer would place more weight on the national statistics.
B50 Estimated probabilities for non-market variables shall not contradict
observable market variables. For example, estimated probabilities for
future inflation rate scenarios shall be as consistent as possible with
probabilities implied by market interest rates. Paragraphs B51 and B52
discuss this further.
B51 In some cases, an insurer concludes that market variables vary
independently of non-market variables. If so, the insurer shall prepare
scenarios that reflect the range of outcomes for the non-market variables
and each scenario shall use the same observed value of the market
variable.
B52 In other cases, market variables and non-market variables may be
correlated. For example, there may sometimes be evidence that lapse
rates are correlated with interest rates. Similarly, there may sometimes
be evidence that claim levels for house or car insurance are correlated
with economic cycles and hence with interest rates and expense
amounts. In such cases, an insurer shall develop scenarios for different
outcomes of the variables. The insurer shall calibrate the probabilities
for the scenarios, and risk adjustments relating to the market variables,
so that they are consistent with observed market prices that depend on
those market variables.
Source of estimates
B53 An insurer estimates the probabilities associated with future payments
under existing contracts on the basis of:
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(a) information about claims already reported by policyholders.
(b) other information about the known or estimated characteristics of
the portfolio of insurance contracts.
(c) historical data about the insurer’s own experience, supplemented
when necessary with historical data from other sources. Historical
data are adjusted if, for example:
(i) the characteristics of the portfolio differ (or will differ,
because of adverse selection) from that of the population used
as a basis for the historical data.
(ii) there is evidence that historical trends will not continue, that
new trends will emerge or that economic, demographic and
other changes may affect the cash flows arising from the
existing insurance contracts.
(iii) there have been changes in items such as underwriting
procedures and claims management procedures that may
affect the relevance of historical data to the portfolio of
insurance contracts.
(d) current price information, if available, for reinsurance contracts
and other instruments (if any) covering similar risks, such as
catastrophe bonds and weather derivatives, and recent market
prices for transfers of portfolios of insurance contracts. This
information is adjusted for differences between the cash flows
arising from those reinsurance contracts or other instruments, and
the cash flows that would arise as the insurer fulfils the underlying
contracts with the policyholder.
Using current estimates
B54 In estimating the probability of each cash flow scenario relating to
non-market variables, an insurer shall use all available current
information at the end of the reporting period. An insurer shall review
the estimates of probabilities it made at the end of the previous reporting
period and update them if evidence indicates that the previous estimates
are no longer valid. In doing so, an insurer shall consider both:
(a) whether the updated estimates represent faithfully conditions at
the end of the reporting period, and
(b) whether changes in estimates represent faithfully changes in
conditions during the period. For example, suppose that estimates
were at one end of a reasonable range at the beginning of the
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period. If conditions have not changed, changing the estimates to
the other end of the range at the end of the period would not
faithfully represent what has happened during the period. If an
insurer’s most recent estimates are, initially, different from its
previous estimates, but conditions have not changed, the insurer
shall assess whether the new probabilities assigned to each
scenario can be justified. In updating its estimates of those
probabilities, the insurer shall consider both the evidence that
supported its previous estimates and all available new evidence,
giving more weight to evidence that is more persuasive.
B55 Current estimates of expected cash flows are not necessarily identical to
the most recent actual experience. For example, suppose that mortality
experience last year was 20 per cent worse than previous experience and
previous expectations. Several factors could have caused the sudden
change in experience, including:
(a) lasting changes in mortality.
(b) changes in the characteristics of the insured population
(eg changes in underwriting or distribution, or selective lapses by
policyholders in unusually good or bad health).
(c) flaws in the estimation model, or mis-calibration of parameters,
such as mortality and lapse rates, used in the model.
(d) random fluctuations.
(e) identifiable non-recurring causes.
B56 An insurer shall investigate the reasons for the change in experience and
develop new probability estimates for the possible outcomes, in the light
of the most recent experience, earlier experience and other information.
Typically, the result for this example would be that the expected present
value of death benefits increases, but not by as much as 20 per cent.
Actuaries have developed various ‘credibility’ techniques that an insurer
could use in assessing how new evidence affects the probability of
different outcomes. In this example, if mortality continues to be
significantly higher than previous estimates, the estimated probability
assigned to high-mortality scenarios will increase as new evidence
becomes available.
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Future events
B57 Estimates of non-market variables shall consider not just current
information about the current level of insured events, but also
information about trends. For example, mortality rates have declined
consistently over long periods in many countries. In developing cash flow
scenarios, an insurer shall assign probabilities to each possible trend
scenario in the light of all available evidence.
B58 Similarly, if cash flows from the insurance contract are sensitive to
inflation, cash flow scenarios shall reflect possible future inflation rates
(see also paragraph B52). Because inflation rates are likely to be
correlated with interest rates, an insurer shall calibrate the probabilities
for each inflation scenario so that they are consistent with probabilities
implied by market interest rates (eg those used in estimating the discount
rate specified in paragraphs 30–34).
B59 In estimating the cash flows from an insurance contract, an insurer shall
take into account future events that might affect the cash flows without
changing the nature of the obligation. The insurer shall develop cash
flow scenarios that reflect those future events, as well as unbiased
estimates of the probability weights for each scenario.
B60 However, an insurer shall not take into account future events, such as a
change in legislation, that would change or discharge the present
obligation or create new obligations under the existing insurance
contract.
Which cash flows?
B61 Estimates of cash flows in a scenario shall include all cash flows within
the boundary of an existing contract that are incremental at the level of
a portfolio of insurance contracts, and no others. Cash outflows that are
incremental to a portfolio of insurance contracts include direct costs and
systematic allocations of costs that relate directly to the insurance
contracts or contract activities. Accordingly, the relevant cash flows
include:
(a) premiums (including premium adjustments and instalment
premiums) from policyholders and any additional cash flows that
result from those premiums.
(b) payments to (or on behalf of) policyholders, including claims that
have already been reported but have not yet been paid (ie reported
claims), claims that have already been incurred but have not yet
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been reported (IBNR) and all future claims and other benefits
under the existing contract.
(c) claim handling costs (ie the costs that the insurer will incur in
processing and resolving claims under existing insurance
contracts, including legal and adjuster’s fees and internal costs of
processing claim payments).
(d) the costs that the insurer will incur in providing contractual
benefits that are paid in kind.
(e) cash flows that will result from options and guarantees embedded
in the contract, to the extent those options and guarantees are not
unbundled (see paragraph 12). When insurance contracts contain
embedded options or guarantees, it is particularly important to
consider the full range of scenarios.
(f) the incremental costs of selling, underwriting and initiating an
insurance contract for those contracts that have been issued and
that the insurer has incurred because it has issued that particular
contract (ie the incremental acquisition costs). Thus, these costs
are identified at the level of an individual insurance contract
rather than at the level of a portfolio of insurance contracts.
(g) policy administration and maintenance costs, such as costs of
premium billing and costs of handling policy changes
(eg conversions and reinstatements). Such costs also include
recurring commissions expected to be paid to intermediaries if a
particular policyholder continues to pay the premiums specified in
the insurance contract.
(h) transaction-based taxes (such as premium taxes, value added taxes
and goods and services taxes) and levies (such as fire service levies
and guarantee fund assessments) that arise directly from existing
insurance contracts, or can be attributed to them on a reasonable
and consistent basis.
(i) potential recoveries (such as salvage and subrogation) on future
claims covered by existing insurance contracts and, to the extent
they do not qualify for recognition as separate assets, potential
recoveries on past claims.
(j) payments to current or future policyholders as a result of a
contractual participation feature (including those features implied
in the contract by regulatory or legal requirements) that provides
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policyholders with participation in the performance of a portfolio
of insurance contracts or pool of assets.
B62 The following cash flows shall not be considered in estimating the cash
flows that will arise as the insurer fulfils an existing insurance contract:
(a) investment returns. The investments are recognised, measured
and presented separately. However, the measurement of a
participating insurance liability is affected by the cash flows, if any,
that depend on the investment returns.
(b) payments to and from reinsurers. Reinsurance assets are
recognised, measured and presented separately.
(c) cash flows that may arise from future insurance contracts, ie cash
flows that are outside the boundary of existing contracts
(see paragraphs 26 and 27), or from options, forwards and
guarantees that do not relate to the existing insurance contract.
Nevertheless, estimates of cash flows from existing contracts are
not performed on a run-off basis. In other words, those estimates
do not incorporate changes in the cash flows from existing
contracts that could take place if the insurer stopped issuing new
contracts, unless the insurer actually stops issuing new contracts.
(d) acquisition costs other than incremental acquisition costs.
(e) cash flows arising from abnormal amounts of wasted labour or
abnormal amounts of other resources used to fulfil the contract.
(f) costs that do not relate directly to the contract or contract
activities, such as general overheads.
(g) income tax payments and receipts. Such payments and receipts are
recognised, measured and presented separately in accordance with
IAS 12 Income Taxes.
(h) cash flows between different components of the reporting entity,
such as between policyholder funds and shareholder funds.
(i) cash flows arising from components that are unbundled from the
insurance contract (eg interest that the insurer expects to credit to
policyholder account balances). See paragraphs 8 and 9.
B63 Some costs relate directly to insurance contracts or contract activities but
are the result of activities that cover more than one portfolio (eg salaries
of staff of a claims handling department working on more than one
portfolio). An insurer shall allocate those costs, other than acquisition
costs (see paragraph B61(f)), on a rational and consistent basis to
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individual portfolios of insurance contracts. Even though such costs are
allocations, they are still incremental at the portfolio level. Costs that are
not incremental at the portfolio (or lower) level because they do not relate
directly to the insurance contract or contract activities, such as general
overheads, are not allocated to portfolios and therefore are not included
in the measurement of insurance contracts.
B64 In some cases an insurer incurs costs that in substance are the equivalent
of cash outflows. For example, an insurer may own a workshop to repair
cars for damages covered under an insurance contract. The cash flows
include the depreciation of that workshop because it is a resource
required to satisfy the insurer’s obligation from its insurance contract.
Level of measurement
B65 In principle, the expected (probability-weighted) cash flows from a
portfolio of insurance contracts equal the sum of the expected cash flows
of the individual contracts. Therefore, the level of aggregation for
measurement does not affect the expected present values of future cash
flows.
B66 However, from a practical point of view, it may be easier to perform some
types of estimate in aggregate for a portfolio, rather than for individual
insurance contracts. For example, IBNR estimates are typically made in
aggregate. Similarly, if expenses are incremental at the portfolio level
but not at an individual insurance contract level, it may be easier, and
perhaps even necessary, to estimate them at an aggregate level. However,
in principle, this is no different from making expected value estimates for
individual insurance contracts and then aggregating the results for the
portfolio of those contracts.
Risk adjustments (paragraphs 35–37)
B67 This section addresses:
(a) objective and characteristics (paragraphs B68–B72).
(b) techniques for estimating risk adjustments
(paragraphs B73 and B74).
(c) features of permitted risk adjustment techniques
(paragraphs B75–B90).
(d) application of risk adjustment techniques (paragraphs B91–B102).
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(e) risk adjustments and the use of a replicating portfolio
(paragraph B103).
Objective and characteristics
B68 The risk adjustment conveys information to users of financial statements
about the effects of uncertainty about the amount and timing of the cash
flows arising from an insurance contract. To achieve this, paragraph 35
requires that the risk adjustment shall be the maximum amount that the
insurer would rationally pay to be relieved of the risk that the ultimate
fulfilment cash flows exceed those expected.
B69 Because the purpose of the risk adjustment is to measure the effect of
uncertainty in the cash flows arising from the insurance contract only,
the risk adjustment shall reflect all risks associated with that contract.
It shall not reflect risks that do not arise from the insurance contract,
such as investment risk (except when investment risk affects the amount
of payments to policyholders), asset-liability mismatch risk or general
operational risk relating to future transactions.
B70 The risk adjustment shall be included in the measurement in an explicit
way. Thus, the risk adjustment is separate from estimates of future cash
flows and the discount rate that adjusts those cash flows for the time
value of money; it cannot be included implicitly in those two other
building blocks. However, that requirement is not intended to preclude
‘replicating portfolio’ approaches (see paragraph B103).
B71 Care is needed to avoid duplicating adjustments for risk (see also
paragraphs B45 and B103).
B72 To meet the objective in paragraph B68, the risk adjustment shall, to the
extent practicable, have the following characteristics:
(a) risks with low frequency and high severity will result in higher risk
adjustments than risks with high frequency and low severity.
(b) for similar risks, contracts with a longer duration will result in
higher risk adjustments than those of a shorter duration.
(c) risks with a wide probability distribution will result in higher risk
adjustments than those risks with a narrower distribution.
(d) the less that is known about the current estimate and its trend, the
higher the risk adjustment shall be.
(e) to the extent that emerging experience reduces uncertainty, risk
adjustments will decrease and vice versa.
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Techniques for estimating risk adjustments
B73 An insurer shall use only the following techniques for estimating risk
adjustments:
(a) confidence level (paragraphs B75–B79).
(b) conditional tail expectation (paragraphs B80–B83).
(c) cost of capital (paragraphs B84–B90).
B74 Paragraphs B75–B90 provide an overview of the main features of those
permitted techniques. Paragraphs B91–B102 discuss how the permitted
techniques could meet the characteristics in paragraph B72 and indicate
when they are applicable.
Features of permitted risk adjustment techniques
Confidence level
B75 The confidence level technique expresses the likelihood that the actual
outcome will be within a specified interval. The confidence level
technique is sometimes referred to as Value at Risk (VaR). The
International Actuarial Association’s paper Measurement of Liabilities for
Insurance Contracts: Current Estimates and Risk Margins describes the use of
confidence levels in estimating a risk adjustment as follows:
[Risk adjustment techniques] based on confidence levels express uncertainty
in terms of the extra amount that must be added to the expected value so
that the probability that the actual outcome will be less than the amount of
the liability (including the risk [adjustment]) over the selected time period
equals the target level of confidence.
B76 The use of confidence levels for estimating a risk adjustment has the
benefits of being relatively easy to communicate to users and relatively
easy to calculate. However, the usefulness of confidence level diminishes
when the probability distribution is not statistically normal (which is
often the case for insurance contracts). When the probability distribution
is not normal (in which case, the probability distribution may be skewed
and the mean may not equal the median), the selection of the confidence
level must take into account additional factors, such as the skewness of
the probability distribution. In addition, this technique ignores outliers
(ie extreme losses in the tail of the distribution beyond the specified
confidence level).
B77 For example, suppose a confidence level of 95 per cent is used and the
following estimates are made for two insurance contracts:
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(a) for contract A, the 95 per cent confidence level is at CU1,000 and
the remaining 5 per cent of the distribution is evenly spread from
CU1,001 to CU1,010.
(b) for contract B, the 95 per cent confidence level is at CU1,000 and
the remaining 5 per cent of the distribution is evenly spread from
CU1,001 to CU2,000.
B78 At the 95 per cent confidence level, those two contracts would have the
same risk adjustment. However, at, for example, the 97 per cent
confidence level, contract A would be measured at CU1,004 and
contract B at CU1,400.
B79 Judgement is required to determine the confidence level (ie what
percentage) to set for particular portfolios of insurance contracts in
particular circumstances. In setting the confidence level, an insurer
needs to consider factors, such as the shape of the distribution, which
may differ by portfolio. Because the distribution can change over time,
the insurer may need to change the confidence level accordingly in future
periods.
Conditional tail expectation
B80 A conditional tail expectation (CTE) (also referred to as a tail conditional
expectation or a tail value at risk) technique is an enhancement of VaR.
A CTE technique provides a better reflection of the potentially extreme
losses than VaR by incorporating the expected value of those extreme
losses into the measurement of the risk adjustment (although a
confidence level technique may meet the objective of the risk adjustment
if the distribution is not particularly skewed). The Society of Actuaries’
paper Analysis of Methods for Determining Margins for Uncertainty under a
Principle-Based Framework for Life Insurance and Annuity Products describes a
CTE technique as follows:
The CTE technique is a modified percentile approach that combines the
percentile and mean values of different cases. It basically calculates the
mean of losses within a certain band (or tail) of pre-defined percentiles. With
the CTE method, the margin is calculated as the probability weighted average
of all scenarios in the chosen tail of the distribution less the mean estimate
(which may or may not be the median, i.e. the 50th percentile).
B81 The CTE over, for example, the 75 per cent confidence level (referred to as
CTE(75)) is the expected value of all outcomes that are in the highest
25 per cent of the claim distribution (ie in the tail). The risk adjustment
in this case would be the expected value of claims at CTE(75) less the
expected value (ie mean) of claims for the entire probability distribution.
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B82 The focus of a CTE technique on the tail of the probability distribution
reflects a fundamental aspect of an insurance contract—the fact that the
tail is the riskiest part of the distribution. Tail risk is an important factor
in contracts with skewed payments, such as insurance contracts that
contain embedded options (eg the interest guarantees and other financial
guarantees embedded in many life insurance products) or that cover
low-frequency high-severity risks (such as an earthquake), or portfolios
that contain significant concentrations of risk. For example, if a large
portfolio of insurance contracts is subject to significant earthquake risk
but the insurer estimates that the probability of an earthquake occurring
is only 1 per cent, the measurement of the insurance contract should not
ignore that risk. As part of the estimation of the amount an insurer
would rationally pay to be relieved of the risk, significant consideration
needs to be given to the tail of the loss distribution. Consequently, CTE
techniques would meet the objective for a risk adjustment described in
paragraph B68. However, a confidence interval technique may meet the
objective if distributions are not particularly skewed.
B83 Judgement is required to determine the CTE band set for particular
portfolios of insurance contracts in particular circumstances. In setting
the CTE band, an insurer will consider the shape of the distribution.
Because the distribution can change over time, the CTE band may need to
change accordingly in future periods.
Cost of capital
B84 Cost of capital techniques are applied for a number of purposes, for
example pricing insurance contracts, valuations in business
combinations, regulatory reporting, internal capital management and
supplementary reporting. For general purpose financial reporting, a cost
of capital technique can be used to estimate a risk adjustment that
reflects the uncertainty about the amount and timing of the future cash
flows that will arise as an insurer fulfils its existing insurance contracts.
B85 In order to fulfil an insurance contract, an insurer needs to hold and
maintain a sufficient amount of capital. If an insurer does not have
sufficient capital, it might be unable to fulfil its obligations and the
policyholders would be likely to surrender their insurance contracts.
B86 An insurer applies a cost of capital technique as follows:
(a) first, the insurer derives an estimated probability distribution for
the cash flows.
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(b) secondly, the insurer sets a confidence level from that distribution.
That confidence level is intended to provide a high degree of
certainty that the insurer will be able to fulfil its obligations under
existing insurance contracts. The difference between the amount
at that confidence level and the expected value (ie mean) of claims
for the entire probability distribution indicates a capital amount
that corresponds to the high degree of certainty that the insurer
will be able to fulfil its obligations under the portfolio of existing
insurance contracts, ignoring any risk factors not related to those
contracts.
(c) lastly, the insurer estimates the risk adjustment by:
(i) applying a factor, in the form of an appropriate annual rate,
to that capital over the lifetime of the contract, and
(ii) making a further adjustment for the time value of money
because the capital will be held in future periods.
B87 For example, suppose an insurer sets the capital amount as the amount
necessary to provide for a confidence level of 99.5 per cent, and estimates
that the corresponding capital amount is CU100. Suppose also that the
insurer estimates that the appropriate capital rate is 8 per cent per year,
and that it will need to hold the capital amount for one year. Therefore,
the risk adjustment will be CU8 (ie the capital amount of CU100 at
8 per cent for one year). For simplicity, this example assumes that the
time value of money is not material. However, the computation of the
risk adjustment using the capital amount and the annual rate needs to
reflect the time value of money, which is particularly relevant if a capital
amount is held for a longer period.
B88 To meet the objective for a risk adjustment (ie to estimate the amount an
insurer would rationally pay to be relieved of the risk that the actual
fulfilment cash flows will exceed those expected), both the amount of
capital and the capital rate need to be derived in an appropriate way, as
follows:
(a) the amount of capital shall be set at a sufficiently high level that it
captures almost the entire tail of the distribution. To do this, an
insurer will need to identify how much uncertainty exists in the
tail of the distribution.
(b) the capital rate shall reflect the risks that are relevant to the
liability (ie those risks that the owners of the insurer would require
for exposure to the risk in the liability), but not reflect risks that
are not relevant to the liability (eg asset risk for non-participating
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insurance contracts and avoidable mismatch risk) or those risks
that are already captured elsewhere in the model. For example,
suppose investors require an 18 per cent return for investing in an
insurer, including:
(i) 4 per cent relating to the time value of money (ie the risk-free
rate, which is not related to the insurance liability; the
insurer can generate that return by investing the capital
amount in risk-free assets and so does not need to generate
that return from the insurance liabilities);
(ii) 2 per cent relating to asset risks borne by the insurer;
(iii) 1 per cent relating to avoidable asset/liability mismatch risk
taken by the insurer; and
(iv) 3 per cent relating to uncertainty about future business
(including operational risk related to future business).
This results in a capital rate of 8 per cent relating to the capital
return (ie the residual, which is calculated as 18 per cent – 4 per cent
– 2 per cent – 1 per cent – 3 per cent).
B89 The cost of capital technique reflects almost the entire distribution, and
only a relatively small band on the far end of the distribution, beyond the
selected confidence level for the capital amount, would not be
considered. This is because the confidence level for determining the
capital amount is set at a level that is intended to provide a high degree
of certainty that the insurer will be able to fulfil its obligations under
existing insurance contracts. Therefore, in setting the confidence level in
the cost of capital technique, an insurer takes into account the possibility
of low-frequency high-severity losses in all but the extreme tail of the
probability distribution. Because the cost of capital technique takes into
account the release of the capital amount over the life of the contract,
this technique also reflects how the risk associated with the insurance
contract changes over time.
B90 The confidence level for the capital amount, and the annual rate applied
to that capital amount to calculate the risk adjustment, shall be set in a
way that reflects the characteristics of the liability at each point in time.
Conceptually, it would be possible to apply different confidence levels
and different capital rates to different types of contracts. However, it may
be possible to apply a consistent confidence level and capital rate to
different portfolios (and over time) because the capital amount needs to
be set so that it captures almost the entire distribution.
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Application of risk adjustment techniques
B91 Paragraph B72 sets out the characteristics that a risk adjustment must
have in order to satisfy the objective (ie to estimate the amount an insurer
would rationally pay to be relieved of the risk that the actual fulfilment
cash flows may exceed those expected). All three techniques permitted by
this [draft] IFRS meet those characteristics in at least some, but not
necessarily all, situations and will do so in varying degrees depending on
the circumstances.
B92 The selection of the most appropriate risk adjustment technique depends
on the nature of an insurance contract. An insurer shall apply judgement
in determining the most appropriate technique to use for each type of
insurance contract. In applying that judgement, an insurer shall also
consider the following:
(a) the technique must be implementable at a reasonable cost and in a
reasonable time, and be auditable;
(b) the technique must provide concise and informative disclosure so
that users of financial statements can benchmark the insurer’s
performance against the performance of other insurers. Paragraph
90(b)(i) requires disclosure of the confidence levels used for the
three permitted techniques.
B93 The following paragraphs describe when each technique is more likely to
be appropriate.
Shape of the probability distribution
B94 Paragraph B72(a) states that risks with low frequency and high severity
will result in higher risk adjustments than risks with high frequency and
low severity. In other words, risk adjustments will be larger for
probability distributions that are more skewed.
B95 Because a confidence level technique focuses on one point in the
probability distribution, it satisfies this characteristic only if the
distribution is not particularly skewed. Consequently, a confidence level
technique is not appropriate for distributions that are highly skewed.
B96 A CTE technique can satisfy this characteristic, even for skewed
distributions, because it considers all outcomes above the confidence
level.
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B97 Similarly, cost of capital techniques can satisfy this characteristic, even
for skewed distributions, if the required capital is set at a sufficiently high
level to capture almost the entire tail of the distribution.
Contract duration
B98 Paragraph B72(b) states that, for similar risks, contracts with a longer
duration will result in higher risk adjustments than those of shorter
duration. The confidence level and CTE techniques achieve this to the
extent that the insurer’s estimate of the distribution of outcomes takes
account of this factor. Cost of capital techniques achieve this in a way
that explicitly reflects the changing shape of the distribution over time by
applying a capital factor (rate) to the capital required during each period
during the life of the contract.
Width of probability distribution
B99 Paragraph B72(c) states that risks with a wide probability distribution will
result in a higher risk adjustment than risks with a narrower distribution.
A confidence level technique achieves this if the additional width of
the distribution is below the selected confidence level. A CTE technique
achieves this because it takes into account the entire tail. A cost of capital
technique takes into account the width of the distribution when the
widening of the distribution does not occur further out in the tail of the
distribution than the confidence level used to estimate the required
capital.
Uncertainty of estimates
B100 Paragraph B72(d) states that the less that is known about the current
estimate and its trend, the higher the risk adjustment shall be.
A confidence level technique and a CTE technique could take into account
this characteristic by, for example, setting a higher confidence level. A cost
of capital technique could take it into account by, for example, increasing
the confidence level used to estimate the required capital.
Emerging experience
B101 Paragraph B72(e) states that to the extent that emerging experience
reduces uncertainty, risk adjustments will decrease (and vice versa).
All three of the techniques meet this characteristic because emerging
experience will affect the loss distribution and, therefore, the amount of
the risk adjustment.
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B102 Thus, in summary, when the probability distribution is not skewed and
does not vary significantly over time, a confidence level technique can
typically provide a risk adjustment that possesses the characteristics
described in paragraph B72. However, when the probability distribution
is skewed or varies significantly over time, a CTE technique or cost of
capital technique is more appropriate, because those approaches result in
a risk adjustment that is likely to be more sensitive to the shape of the
distribution of possible outcomes around the mean (and, thus, the risk)
and to changes in its shape over time.
Risk adjustments and the use of a replicating portfolio
B103 The requirement that a risk adjustment is included in the measurement
in an explicit way (ie separately from the expected cash flows and
discount rate building blocks), does not preclude a ‘replicating portfolio’
approach as described in paragraphs B45–B47. To avoid double-counting,
the risk adjustment does not include any risk that is captured in the fair
value of the replicating portfolio.
Insurance contracts acquired in portfolio transfers
(paragraph 40)
B104 Paragraph 40 requires an entity to measure a portfolio of insurance
contracts acquired in a portfolio transfer at the higher of the
consideration received and the present value of the fulfilment cash flows.
B105 If the consideration received is higher than the present value of the
fulfilment cash flows, the excess (ie the consideration received less the
present value of the fulfilment cash flows) establishes the residual
margin at initial recognition (which will be recognised in profit or loss
over the coverage period in accordance with paragraph 50.
B106 If the present value of fulfilment cash flows is higher than the
consideration received, the excess (ie the present value of the fulfilment
cash flows less the consideration received) is immediately recognised in
profit or loss as an expense in accordance with paragraph 18.
B107 The following example illustrates how an entity applies this principle.
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Insurance contracts acquired in a business
combination (paragraph 42)
B108 Paragraph 42 requires an insurer to measure a portfolio of insurance
contracts acquired in a business combination at the higher of the fair
value of the portfolio and the present value of the fulfilment cash flows.
If the present value of the fulfilment cash flows is higher than the fair
value, the excess (ie the present value of the fulfilment cash flows less the
fair value) would increase the initial carrying amount of goodwill
recognised in the business combination.
Example 3 – Measurement of a portfolio of insurance contracts
acquired in a portfolio transfer
An insurer acquires a portfolio of insurance contracts in a portfolio
transfer. The consideration received is CU30. In Example 3A, the
insurer estimates that the present value of the fulfilment cash flows is
CU20, which is lower than the consideration received. In Example 3B,
the insurer estimates that the present value of the fulfilment cash flows
is CU45, which is higher than the consideration received. At initial
recognition, the insurer measures the insurance contract liability as
follows:
Example 3A Example 3B
CU CU
Present value of the fulfilment cash flows 20 45
Residual margin 10 0
Liability at initial recognition 30 45
In Example 3A, the insurer measures the portfolio at the consideration
received of CU30. As a result, the difference of CU10 between the
consideration received and the present value of the fulfilment cash
flows establishes the residual margin at initial recognition.
In Example 3B, the insurer measures the portfolio at the expected
present value of CU45. As a result, the difference of CU15 between the
consideration received and the present value of the fulfilment cash
flows is recognised as an expense at initial recognition.
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B109 The following example illustrates how an entity applies this principle.
Measurement of insurance contracts on transition
(paragraph 100)
B110 The transition requirements in paragraph 100 require an insurer to
measure an insurance contract at the present value of the fulfilment
cash flows, and to recognise any resulting adjustment in retained
earnings. In addition, an insurer shall derecognise any existing
balances of deferred acquisition costs and any intangible assets relating
to existing insurance contracts assumed in previous business
combinations with a corresponding adjustment to retained earnings.
The following example illustrates how an entity applies this principle.
Example 4 – Measurement of a portfolio of insurance
contracts acquired in a business combination
An insurer acquires a portfolio of insurance contracts in a business
combination. The fair value of the portfolio is CU30. In Example 4A,
the insurer estimates that the present value of fulfilment cash flows is
CU20, which is lower than the fair value. In Example 4B, the insurer
estimates that the present value of the fulfilment cash flows amounts
to CU45, which is higher than the fair value. At initial recognition, the
insurer measures the insurance contract liability as follows:
Example 4A Example 4B
CU CU
Present value of the fulfilment cash flows 20 45
Residual margin 10 0
Liability at initial recognition 30 45
In Example 4A, the insurer measures the portfolio at its fair value of
CU30. As a result, the difference of CU10 between the fair value and the
present value of the fulfilment cash flows establishes the residual
margin at initial recognition.
In Example 4B, the insurer measures the portfolio at the present value
of the fulfilment cash flows of CU45. As a result, goodwill initially
recognised in the business combination is CU15 higher than it would
have been if the insurer had measured the portfolio at its fair value of
CU30.
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Example 5 – Measurement of insurance contracts on transition
An entity presented the following amounts in its financial statements
in accordance with its previous accounting policies:
CU
Deferred acquisition costs (DAC) 150
Intangible assets relating to existing contracts 125
Intangible assets relating to possible future
contracts
75
Insurance contract liabilities (900)
On the date of transition, the entity estimates that the present value of
the fulfilment cash flows of its insurance liabilities is CU630. The
entity also concludes that the intangible assets relating to possible
future contracts are appropriately recognised and measured in
accordance with IFRSs.
As a result, the entity recognises the following adjustments on the date
of initial recognition:
- a decrease in insurance liabilities of CU270 (CU900 – CU630);
- a total decrease in assets of CU275 to derecognise the DAC of CU150
and the intangible assets relating to existing insurance contracts of
CU125; and
- a net reduction of CU5 in retained earnings (CU275 – CU270).
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Appendix C
Amendments to other IFRSs
The Board expects to make the amendments described below when it finalises the new standard
on insurance contracts.
Standard Description of amendment
• IFRS 1 First-time Adoption of
International Financial
Reporting Standards
• Delete second sentence of D4. This
refers to material in IFRS 4 that is no
longer relevant.
• Delete reference in IG58A to financial
guarantee contracts. See draft
amendment to IAS 39.
• IFRS 3 Business
Combinations
• Introduce a measurement exception for
insurance contracts, consistent with
paragraph 42 of the exposure draft.
• IFRS 7 Financial
Instruments: Disclosures and
IAS 32 Financial
Instruments: Presentation
• Delete the definition of financial
guarantee contracts.
• Amend the scope exclusion for
insurance contracts, to treat financial
guarantee contracts in the same way as
all other insurance contracts.
At present, some requirements of IFRS 7
and IAS 32 apply to such contracts, but
the proposed requirements for
insurance contracts would remove the
need for this.
• Introduce a scope exclusion for
investment contracts with a
discretionary participation feature.
As a result, paragraph 29(c) of IFRS 7,
which exempts entities from disclosing
the fair value of these contracts, would
become redundant.
• Amend example in paragraph AG8 of
IAS 32 (a financial guarantee contract)
so that the example provided is a
financial instrument, not an insurance
contract. An example could be a
guarantee that requires a payment in
response to changes in specified credit
ratings (IAS 39, paragraph AG4(b)).
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• IFRS 9 Financial
Instruments and IAS 32
Financial Instruments:
Presentation
• Introduce a requirement to recognise
and measure at fair value through
profit or loss shares issued by an insurer
and held as part of a pool of assets
underlying unit-linked contracts.
• IAS 16 Property, Plant and
Equipment
• Introduce a requirement to measure at
fair value through profit or loss
property owned and occupied by the
insurer that is part of a pool of assets
underlying unit-linked contracts.
• IAS 36 Impairment of Assets
and IAS 38 Intangible
Assets
• Delete the scope exclusion for deferred
acquisition costs arising from insurance
contracts, as such items will no longer
exist.
• IAS 37 Provisions,
Contingent Liabilities and
Contingent Assets
• Delete Example 9, which illustrates
existing requirements for financial
guarantee contracts, and replace it with
an example illustrating the IAS 37
requirements for other guarantee
obligations (such as statutory
guarantees) that would continue to be
within the scope of IAS 37.
• IAS 39 Financial
Instruments: Recognition
and Measurement
• Delete the definition of a financial
guarantee contract (‘a contract that
requires the issuer to make specified
payments to reimburse the holder for a
loss it incurs because a specified debtor
fails to make payment when due in
accordance with the original or
modified terms of a debt instrument’).
• Amend the scope exclusion for
insurance contracts, to treat financial
guarantee contracts in the same way as
all other insurance contracts. Delete
paragraph 47(c) on subsequent
measurement of financial guarantee
contracts. Update discussion of
financial guarantee contracts in
paragraph AG4 to reflect these changes.
• Update paragraph AG4E(b) to reflect the
use of current information in the
proposed measurement model for
insurance contracts.