[IFRS 17] A contract under which one party (the issuer) 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.
The assessment of whether the insurance risk is ‘significant’ has changed slightly. Under IFRS 4, the entity should determine whether, for any scenario that has commercial substance, the amounts to be paid if the insured event occurs significantly differ from the amounts to be paid if the insured event does not occur. The new standard clarifies that this assessment should be made on a present value basis.
Insurance risk is significant if, and only if, an insured event could cause the issuer to pay additional amounts that are significant in any single scenario, excluding scenarios that have no commercial substance (i.e., scenarios with no discernible effect on the economics of the transaction). IFRS 17 clarifies this to require that [IFRS 17 B17]:
- An insurer must consider the time value of money in assessing whether the additional amounts payable in any scenario are significant.
- A contract does not transfer significant insurance risk if there is no scenario with commercial substance in which the insurer can suffer a loss on a present value basis.
If an insurance contract requires payment when an event with uncertain timing occurs and the payment is not adjusted for the time value of money, there may be scenarios in which the present value of the payment increases, even if its nominal value is fixed. An example is insurance that provides a fixed death benefit when the policyholder dies. It is certain that the policyholder will die, but the date of death is uncertain. If the policyholder dies earlier than expected significant insurance risk could exist, as those payments are not adjusted for the time value of money, even if there is no overall loss on the portfolio of contracts [IFRS 17 B20].
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