Combination of Insurance Contracts – An entity might enter into a series of insurance contracts with the same or a related counterparty to achieve an overall economic effect. In order to ensure that the accounting reflects the substance of these contracts, it might be necessary to combine the group or series of contracts and analyze them in their entirety. If, for example, an entity enters into two separate insurance contracts with the same counterparty at the same time with exactly opposite rights and obligations, it does not account for those contracts, because the combined effect is that no rights and obligations exist.
The combination requirements for insurance contracts under IFRS 17 changed compared to IFRS 4. There are no specific requirements about the combination of insurance contracts in IFRS 4 where entities are using different accounting policies. This could affect insurers entering into fronting arrangements. An example of a situation where the accounting might change is set out below.
A policyholder transfers risks to a third party insurer, but all of the risks are then passed back to the same policyholder under a reinsurance arrangement. There might be situations where the same legal entity is both the policyholder and the reinsurer, or where the policyholder and the reinsurer are different legal entities but they are part of the same group. Accounting for contracts by the insurer could be affected by the new combination requirements. Combination of Insurance Contracts
Entities should analyze the terms of each arrangement to conclude whether contracts should be combined under the new requirements in IFRS 17.
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Food for IFRS thoughts – contracts management IFRS 17’s requirement to combine contracts, which achieve common overall commercial impact may influence the way certain fronting arrangements are reported. For example, where an insurer issues a contract to a direct policyholder or assumes reinsurance but at the same time enters into a mirroring back-to-back outwards reinsurance contract, when combined, these arrangements may not meet the criteria for significant insurance risk transfer for the fronting cedent. As a result, unforeseen impacts may arise on key performance indicators (KPIs) or capital and risks management targets (eg from additional counterparty risk). Food for IFRS thoughts – product development IFRS 17 may pose a challenge to existing interpretations of contract clauses or certain products’ Terms and Conditions. When preparing for IFRS 17 transition, entities may have to revisit prior analysis before they confirm or rebut historic decisions on unbundling. Entities may have to redesign controls around future product development and approval to achieve sufficient rigour over identification of components outside IFRS 17’s scope. The same applies to IT systems capability for processing, and appropriate data capture for measurement and disclosure. Much closer collaboration will be needed between financial reporting specialists, actuaries and underwriters. Food for IFRS thoughts – Combination of insurance contracts IFRS 17 contains requirements on when different insurance contracts should be combined. Based on the TRG discussion, the factors to consider should be consistent with the analysis that was described for the separation of insurance contract components. The existence of a discount or the fact that the contracts were entered into at the same time with the same counterparty is not by itself sufficient to conclude that contracts should be combined. Entities will need to analyse whether the contracts achieve or are designed to achieve an overall commercial effect applying significant judgement and careful consideration of all relevant facts and circumstances, wherein no single factor is determinative in applying the assessments. |
Example disclosure
2.2.1. Judgements
Unit of account – Judgements involved in combination of insurance contracts and separation of distinct components
Combination of Insurance Contracts Combination of Insurance Contracts
Combination of Insurance Contracts Combination of Insurance Contracts
| Areas of potential judgement | Applicable to the Group |
| Combination of insurance contracts – whether the contracts with the same or related counterparty achieve or are designed to achieve an overall commercial effect and require combination. (IFRS 17 9) | No respective judgement is applicable to the Group. |
| Separation – whether components in IFRS 17 11-12 are distinct (i.e. meet the separation criteria). | No respective judgement is applicable to the Group. |
| Separation of contracts with multiple insurance coverage – whether there are facts and circumstances where the legal form of an insurance contract does not reflect the substance and separation is required. (IFRS 17 B31 – B35) | No respective judgement is applicable to the Group. |
Combination of Insurance Contracts
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