Insurance Contracts | Course Paper

IFRS 17

Insurance Contracts

In March 2004 the International Accounting Standards Board (Board) issued IFRS 4

Insurance Contracts. IFRS 4 was an interim standard which was meant to be in place until

the Board completed its project on insurance contracts. IFRS 4 permitted entities to use a

wide variety of accounting practices for insurance contracts, reflecting national

accounting requirements and variations of those requirements, subject to limited

improvements and specified disclosures.

In May 2017, the Board completed its project on insurance contracts with the issuance of

IFRS 17 Insurance Contracts. IFRS 17 replaces IFRS 4 and sets out principles for the

recognition, measurement, presentation and disclosure of insurance contracts within the

scope of IFRS 17.

Other Standards have made minor consequential amendments to IFRS 17, including

Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018)

and Definition of Material (Amendments to IAS 1 and IAS 8) (issued October 2018).

IFRS 17

CONTENTS

from paragraph

IFRS 17 INSURANCE CONTRACTS

OBJECTIVE 1

SCOPE 3

Combination of insurance contracts 9

Separating components from an insurance contract 10

LEVEL OF AGGREGATION OF INSURANCE CONTRACTS 14

RECOGNITION 25

MEASUREMENT 29

Measurement on initial recognition 32

Subsequent measurement 40

Onerous contracts 47

Premium allocation approach 53

Reinsurance contracts held 60

Investment contracts with discretionary participation features 71

MODIFICATION AND DERECOGNITION 72

Modification of an insurance contract 72

Derecognition 74

PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION 78

RECOGNITION AND PRESENTATION IN THE STATEMENT(S) OF FINANCIAL

PERFORMANCE 80

Insurance service result 83

Insurance finance income or expenses 87

DISCLOSURE 93

Explanation of recognised amounts 97

Significant judgements in applying IFRS 17 117

Nature and extent of risks that arise from contracts within the scope of

IFRS 17 121

APPENDICES

A Defined terms

B Application guidance

C Effective date and transition

D Amendments to other IFRS Standards

APPROVAL BY THE BOARD OF IFRS 17 INSURANCE CONTRACTS

FOR THE ACCOMPANYING GUIDANCELISTED BELOW, SEE PART B OF THIS EDITION

ILLUSTRATIVE EXAMPLES

continued…

IFRS 17

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FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION

BASIS FOR CONCLUSIONS

IFRS 17

IFRS 17 Insurance Contracts is set out in paragraphs 1–132 and appendices A–D. 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 that they appear in the

Standard. Definitions of other terms are given in the Glossary for IFRS Standards. The

Standard should be read in the context of its objective and the Basis for Conclusions,

the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. 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.

IFRS 17

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International Financial Reporting Standard 17

Insurance Contracts

Objective

IFRS 17 Insurance Contracts establishes principles for the recognition,

measurement, presentation and disclosure of insurance contracts within the

scope of the Standard. The objective of IFRS 17 is to ensure that an entity

provides relevant information that faithfully represents those contracts.

This information gives a basis for users of financial statements to assess the

effect that insurance contracts have on the entity’s financial position,

financial performance and cash flows.

An entity shall consider its substantive rights and obligations, whether they

arise from a contract, law or regulation, when applying IFRS 17. A contract is

an agreement between two or more parties that creates enforceable rights and

obligations. Enforceability of the rights and obligations in a contract is a

matter of law. Contracts can be written, oral or implied by an entity’s

customary business practices. Contractual terms include all terms in a

contract, explicit or implied, but an entity shall disregard terms that have no

commercial substance (ie no discernible effect on the economics of the

contract). Implied terms in a contract include those imposed by law or

regulation. The practices and processes for establishing contracts with

customers vary across legal jurisdictions, industries and entities. In addition,

they may vary within an entity (for example, they may depend on the class of

customer or the nature of the promised goods or services).

Scope

An entity shall apply IFRS 17 to:

(a) insurance contracts, including reinsurance contracts, it issues;

(b) reinsurance contracts it holds; and

(c) investment contracts with discretionary participation features it issues,

provided the entity also issues insurance contracts.

All references in IFRS 17 to insurance contracts also apply to:

(a) reinsurance contracts held, except:

(i) for references to insurance contracts issued; and

(ii) as described in paragraphs 60–70.

(b) investment contracts with discretionary participation features as set

out in paragraph 3(c), except for the reference to insurance contracts

in paragraph 3(c) and as described in paragraph 71.

All references in IFRS 17 to insurance contracts issued also apply to insurance

contracts acquired by the entity in a transfer of insurance contracts or a

business combination other than reinsurance contracts held.

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IFRS 17

Appendix A defines an insurance contract and paragraphs B2–B30 of

Appendix B provide guidance on the definition of an insurance contract.

An entity shall not apply IFRS 17 to:

(a) warranties provided by a manufacturer, dealer or retailer in

connection with the sale of its goods or services to a customer (see

IFRS 15 Revenue from Contracts with Customers).

(b) employers’ assets and liabilities from 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).

(c) contractual rights or contractual obligations contingent on the future

use of, or the right to use, a non-financial item (for example, some

licence fees, royalties, variable and other contingent lease payments

and similar items: see IFRS 15, IAS 38 Intangible Assets and IFRS 16

Leases).

(d) residual value guarantees provided by a manufacturer, dealer or

retailer and a lessee’s residual value guarantees when they are

embedded in a lease (see IFRS 15 and IFRS 16).

(e) financial guarantee contracts, unless the issuer has previously asserted

explicitly that it regards such contracts as insurance contracts and has

used accounting applicable to insurance contracts. The issuer shall

choose to apply either IFRS 17 or IAS 32 Financial Instruments:

Presentation, IFRS 7 Financial Instruments: Disclosures and IFRS 9 Financial

Instruments to such financial guarantee contracts. The issuer may make

that choice contract by contract, but the choice for each contract is

irrevocable.

(f) contingent consideration payable or receivable in a business

combination (see IFRS 3 Business Combinations).

(g) insurance contracts in which the entity is the policyholder, unless those

contracts are reinsurance contracts held (see paragraph 3(b)).

Some contracts meet the definition of an insurance contract but have as their

primary purpose the provision of services for a fixed fee. An entity may choose

to apply IFRS 15 instead of IFRS 17 to such contracts that it issues if, and only

if, specified conditions are met. The entity may make that choice contract by

contract, but the choice for each contract is irrevocable. The conditions are:

(a) the entity does not reflect an assessment of the risk associated with an

individual customer in setting the price of the contract with that

customer;

(b) the contract compensates the customer by providing services, rather

than by making cash payments to the customer; and

(c) the insurance risk transferred by the contract arises primarily from the

customer’s use of services rather than from uncertainty over the cost

of those services.

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Combination of insurance contracts

A set or series of insurance contracts with the same or a related counterparty

may achieve, or be designed to achieve, an overall commercial effect. In order

to report the substance of such contracts, it may be necessary to treat the set

or series of contracts as a whole. For example, if the rights or obligations in

one contract do nothing other than entirely negate the rights or obligations in

another contract entered into at the same time with the same counterparty,

the combined effect is that no rights or obligations exist.

Separating components from an insurance contract

(paragraphs B31–B35)

An insurance contract may contain one or more components that would be

within the scope of another Standard if they were separate contracts. For

example, an insurance contract may include an investment component or a

service component (or both). An entity shall apply paragraphs 11–13 to

identify and account for the components of the contract.

An entity shall:

(a) apply IFRS 9 to determine whether there is an embedded derivative to

be separated and, if there is, how to account for that derivative.

(b) separate from a host insurance contract an investment component if,

and only if, that investment component is distinct (see paragraphs

B31–B32). The entity shall apply IFRS 9 to account for the separated

investment component.

After applying paragraph 11 to separate any cash flows related to embedded

derivatives and distinct investment components, an entity shall separate from

the host insurance contract any promise to transfer distinct goods or

non‑insurance services to a policyholder, applying paragraph 7 of IFRS 15. The

entity shall account for such promises applying IFRS 15. In applying

paragraph 7 of IFRS 15 to separate the promise, the entity shall apply

paragraphs B33–B35 of IFRS 17 and, on initial recognition, shall:

(a) apply IFRS 15 to attribute the cash inflows between the insurance

component and any promises to provide distinct goods or

non‑insurance services; and

(b) attribute the cash outflows between the insurance component and any

promised goods or non‑insurance services accounted for applying

IFRS 15 so that:

(i) cash outflows that relate directly to each component are

attributed to that component; and

(ii) any remaining cash outflows are attributed on a systematic and

rational basis, reflecting the cash outflows the entity would

expect to arise if that component were a separate contract.

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IFRS 17

After applying paragraphs 11–12, an entity shall apply IFRS 17 to all

remaining components of the host insurance contract. Hereafter, all

references in IFRS 17 to embedded derivatives refer to derivatives that have

not been separated from the host insurance contract and all references to

investment components refer to investment components that have not been

separated from the host insurance contract (except those references in

paragraphs B31–B32).

Level of aggregation of insurance contracts

An entity shall identify portfolios of insurance contracts. A portfolio

comprises contracts subject to similar risks and managed together.

Contracts within a product line would be expected to have similar risks

and hence would be expected to be in the same portfolio if they are

managed together. Contracts in different product lines (for example single

premium fixed annuities compared with regular term life assurance) would

not be expected to have similar risks and hence would be expected to be in

different portfolios.

Paragraphs 16–24 apply to insurance contracts issued. The requirements

for the level of aggregation of reinsurance contracts held are set out in

paragraph 61.

An entity shall divide a portfolio of insurance contracts issued into a

minimum of:

(a) a group of contracts that are onerous at initial recognition, if any;

(b) a group of contracts that at initial recognition have no significant

possibility of becoming onerous subsequently, if any; and

(c) a group of the remaining contracts in the portfolio, if any.

If an entity has reasonable and supportable information to conclude that a set

of contracts will all be in the same group applying paragraph 16, it may

measure the set of contracts to determine if the contracts are onerous (see

paragraph 47) and assess the set of contracts to determine if the contracts

have no significant possibility of becoming onerous subsequently (see

paragraph 19). If the entity does not have reasonable and supportable

information to conclude that a set of contracts will all be in the same group, it

shall determine the group to which contracts belong by considering individual

contracts.

For contracts issued to which an entity applies the premium allocation

approach (see paragraphs 53–59), the entity shall assume no contracts in the

portfolio are onerous at initial recognition, unless facts and circumstances

indicate otherwise. An entity shall assess whether contracts that are not

onerous at initial recognition have no significant possibility of becoming

onerous subsequently by assessing the likelihood of changes in applicable

facts and circumstances.

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IFRS 17

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For contracts issued to which an entity does not apply the premium allocation

approach (see paragraphs 53–59), an entity shall assess whether contracts that

are not onerous at initial recognition have no significant possibility of

becoming onerous:

(a) based on the likelihood of changes in assumptions which, if they

occurred, would result in the contracts becoming onerous.

(b) using information about estimates provided by the entity’s internal

reporting. Hence, in assessing whether contracts that are not onerous

at initial recognition have no significant possibility of becoming

onerous:

(i) an entity shall not disregard information provided by its

internal reporting about the effect of changes in assumptions

on different contracts on the possibility of their becoming

onerous; but

(ii) an entity is not required to gather additional information

beyond that provided by the entity’s internal reporting about

the effect of changes in assumptions on different contracts.

If, applying paragraphs 14–19, contracts within a portfolio would fall into

different groups only because law or regulation specifically constrains the

entity’s practical ability to set a different price or level of benefits for

policyholders with different characteristics, the entity may include those

contracts in the same group. The entity shall not apply this paragraph by

analogy to other items.

An entity is permitted to subdivide the groups described in paragraph 16. For

example, an entity may choose to divide the portfolios into:

(a) more groups that are not onerous at initial recognition—if the entity’s

internal reporting provides information that distinguishes:

(i) different levels of profitability; or

(ii) different possibilities of contracts becoming onerous after

initial recognition; and

(b) more than one group of contracts that are onerous at initial

recognition—if the entity’s internal reporting provides information at

a more detailed level about the extent to which the contracts are

onerous.

An entity shall not include contracts issued more than one year apart in

the same group. To achieve this the entity shall, if necessary, further divide

the groups described in paragraphs 16–21.

A group of insurance contracts shall comprise a single contract if that is the result

of applying paragraphs 14–22.

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IFRS 17

An entity shall apply the recognition and measurement requirements of

IFRS 17 to the groups of contracts issued determined by applying paragraphs

14–23. An entity shall establish the groups at initial recognition, and shall not

reassess the composition of the groups subsequently. To measure a group of

contracts, an entity may estimate the fulfilment cash flows at a higher level of

aggregation than the group or portfolio, provided the entity is able to include

the appropriate fulfilment cash flows in the measurement of the group,

applying paragraphs 32(a), 40(a)(i) and 40(b), by allocating such estimates to

groups of contracts.

Recognition

An entity shall recognise a group of insurance contracts it issues from the

earliest of the following:

(a) the beginning of the coverage period of the group of contracts;

(b) the date when the first payment from a policyholder in the group

becomes due; and

(c) for a group of onerous contracts, when the group becomes onerous.

If there is no contractual due date, the first payment from the policyholder is

deemed to be due when it is received. An entity is required to determine

whether any contracts form a group of onerous contracts applying

paragraph 16 before the earlier of the dates set out in paragraphs 25(a) and

25(b) if facts and circumstances indicate there is such a group.

An entity shall recognise an asset or liability for any insurance acquisition cash

flows relating to a group of issued insurance contracts that the entity pays or

receives before the group is recognised, unless it chooses to recognise them as

expenses or income applying paragraph 59(a). An entity shall derecognise the

asset or liability resulting from such insurance acquisition cash flows when

the group of insurance contracts to which the cash flows are allocated is

recognised (see paragraph 38(b)).

In recognising a group of insurance contracts in a reporting period, an entity

shall include only contracts issued by the end of the reporting period and shall

make estimates for the discount rates at the date of initial recognition (see

paragraph B73) and the coverage units provided in the reporting period

(see paragraph B119). An entity may issue more contracts in the group after

the end of a reporting period, subject to paragraph 22. An entity shall add the

contracts to the group in the reporting period in which the contracts are

issued. This may result in a change to the determination of the discount rates

at the date of initial recognition applying paragraph B73. An entity shall apply

the revised rates from the start of the reporting period in which the new

contracts are added to the group.

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IFRS 17

Measurement (paragraphs B36–B119)

An entity shall apply paragraphs 30–52 to all groups of insurance

contracts within the scope of IFRS 17, with the following exceptions:

(a) for groups of insurance contracts meeting either of the criteria

specified in paragraph 53, an entity may simplify the measurement of

the group using the premium allocation approach in paragraphs

55–59.

(b) for groups of reinsurance contracts held, an entity shall

apply paragraphs 32–46 as required by paragraphs 63–70.

Paragraphs 45 (on insurance contracts with direct participation features)

and 47–52 (on onerous contracts) do not apply to groups of reinsurance

contracts held.

(c) for groups of investment contracts with discretionary participation

features, an entity shall apply paragraphs 32–52 as modified

by paragraph 71.

When applying IAS 21 The Effects of Changes in Foreign Exchange Rates to a group

of insurance contracts that generate cash flows in a foreign currency, an

entity shall treat the group of contracts, including the contractual service

margin, as a monetary item.

In the financial statements of an entity that issues insurance contracts, the

fulfilment cash flows shall not reflect the non-performance risk of that entity

(non-performance risk is defined in IFRS 13 Fair Value Measurement).

Measurement on initial recognition (paragraphs B36–B95)

On initial recognition, an entity shall measure a group of insurance

contracts at the total of:

(a) the fulfilment cash flows, which comprise:

(i) estimates of future cash flows (paragraphs 33–35);

(ii) an adjustment to reflect the time value of money and the

financial risks related to the future cash flows, to the extent

that the financial risks are not included in the estimates of

the future cash flows (paragraph 36); and

(iii) a risk adjustment for non-financial risk (paragraph 37).

(b) the contractual service margin, measured applying paragraphs

38–39.

Estimates of future cash ows (paragraphs B36–B71)

An entity shall include in the measurement of a group of insurance

contracts all the future cash flows within the boundary of each contract in

the group (see paragraph 34). Applying paragraph 24, an entity may

estimate the future cash flows at a higher level of aggregation and then

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IFRS 17

allocate the resulting fulfilment cash flows to individual groups of

contracts. The estimates of future cash flows shall:

(a) incorporate, in an unbiased way, all reasonable and supportable

information available without undue cost or effort about the

amount, timing and uncertainty of those future cash flows (see

paragraphs B37–B41). To do this, an entity shall estimate the

expected value (ie the probability-weighted mean) of the full range

of possible outcomes.

(b) reflect the perspective of the entity, provided that the estimates of

any relevant market variables are consistent with observable market

prices for those variables (see paragraphs B42–B53).

(c) be current—the estimates shall reflect conditions existing at the

measurement date, including assumptions at that date about the

future (see paragraphs B54–B60).

(d) be explicit—the entity shall estimate the adjustment for non-

financial risk separately from the other estimates (see

paragraph B90). The entity also shall estimate the cash flows

separately from the adjustment for the time value of money and

financial risk, unless the most appropriate measurement technique

combines these estimates (see paragraph B46).

IFRS 17