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.
Entities should analyze the terms of each arrangement to conclude whether contracts should be combined under the new requirements in IFRS 17.