Accounting policies for financial instruments

Accounting policies for financial instruments – a quite complete overview of all kinds of accounting issues for financial instruments such as measurement categories, initial recognition, amortised costs and effective interest rate, financial assets, impairment, derecognition, financial liabilities, derecognition, and derivatives. Enjoy it!

Summary of significant financial instruments accounting policies

1 Financial assets and liabilities

1.1 Summary of measurement categories

The insurer classifies its financial assets into the following categories:

Business model and cash flow characteristics

Type of financial instruments

Classification

Hold to collect business model and solely payments of principal and interest

Cash and cash equivalents

Amortised cost (AC)

Hold to collect and sell business model and solely payments of principal and interest

Government bonds

Fair value through other

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Measurement of remaining coverage

Measurement of remaining coverage – An entity measures the liability for remaining coverage on initial recognition of a group of insurance contracts eligible for the premium allocation approach (PAA) that are not onerous, as follows (IFRS 17 55]:

  • The premium, if any, received at initial recognition
    Minus Measurement of remaining coverage
  • Any insurance Read more

Significant insurance risk – How 2 best account it under IFRS 17

Significant insurance risk An insurance contract is only in the scope of IFRS 17 if it transfers a significant amount of insurance risk to the entity/reinsurer

Insurances acquired in the run-off period

Insurances acquired in the run-off period

An otherwise solvent insurer determines that it wishes to exit from a particular class of insurance contracts, but wishes to continueInsurances acquired in the run-off period underwriting in other classes. This could be the result of strategic considerations, lack of profitability in the to be discontinued class, or a desire to restructure and to focus on the remaining classes. Insurances acquired in the run-off period

Other meanings of run-off in the insurance industry context could be: Insurances acquired in the run-off period

  1. An insurance company will be considered to be in run-off when it ceases to take on-board any new business but will continue to honor existing claims. Usually, when the net balance of the company’s assets and liabilities is such that the insurer does not have the ability to honor all existing policies based on their predicted loss, the company will cease to write new policies and attempt to use their existing assets to pay off any claims arising from existing clients. In such instances, those with existing claims need not worry about their insurer being in a runoff, as their claim will be considered superior to that of any creditor. Insurances acquired in the run-off period
  2. Run-off insurance, on the other hand, is a type of insurance policy that provides liability coverage against claims made against companies that have been acquired, merged, or have ceased operations. Run-off insurance is generally purchased by the company being acquired and protects it and its officers and directors, among other things, from claims and lawsuits, filed relating to the company’s activity subsequent to the date of acquisition.

    This type of policy is also usually a claims-made policy, meaning that coverage is based on the fact the claim may be made several years after the incident that caused damage or loss, and the policy period is based upon the date the claim is presented and not the date of the occurrence subject of the claim. The length of the run-off policy or the “runoff” as it is usually referred to, is typically set for several years after the policy becomes active. The provision is typically purchased by the company being acquired. Insurances acquired in the run-off period

Insurances acquired in the run-off periodAn insurance company will considered to be in run-off when it ceases to take onboard any new business but will continue to honor existing claims. Usually when the net balance of the company’s assets and liabilities is such that the insurer does not have the ability to honor all existing policies based on their predicted loss, the company will cease to write new policies and attempt to use their existing assets to pay off any claims arising from existing clients. In such instances, those with existing claims need not worry about their insurer being in run off, as their claim will be considered superior to that of any creditor. Insurances acquired in the run-off period

Another variant on this scenario is when an otherwise solvent insurer determines that it wishes to exit from a particular class of business, but wishes to continue underwriting in other classes. This could be the result of strategic considerations, lack of profitability in the to be discontinued class, or a desire to restructure and to focus on the remaining classes.


Runoff Provision — a provision in a claims-made policy stating that the insurer remains liable for claims caused by wrongful acts that took place under an expired or canceled policy, for a certain time period. Insurances acquired in the run-off period

For example, consider a policy written with a January 1, 2015-2016, term and a 5-year runoff provision. In this situation, coverage will apply under the runoff provision to all claims caused by wrongful acts committed during the January 1, 2015-2016, policy period that are made against the insured and reported to the insurer from January 1, 2016-2021 (i.e., the 5-year period immediately following the expiration of the January 1, 2015-2016, policy). Insurances acquired in the run-off period

Although runoff provisions function in a manner that is identical to extended reporting period (ERP) provisions, there are several differences. First, ERPs are generally written for only 1-year terms, whereas runoff provisions normally encompass multi-year time spans, often as long as 5 years.

Second, while ERPs are most frequently purchased when an insured changes from one claims-made insurer to another, runoff provisions are generally used when one insured is acquired by or merges with another. In such instances, the acquired company buys a runoff provision that covers claims associated with wrongful acts that took place prior to the acquisition but are made against the acquired company after it has been acquired.

Insurances acquired in the run-off period

Insurances acquired in the run-off period

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Introduction IFRS 17 Insurance contracts

Introduction IFRS 17 Insurance contracts – More than 20 years in development, IFRS 17 represents a complete overhaul of accounting for insurance contracts. The new standard applies a current value approach to measuring insurance contracts and recognises profit as insurers provide services and are released from risk. Introduction IFRS 17 Insurance contracts

The profit or loss earned from underwriting activities are reported separately from financing activities. Detailed note disclosures explain how items like new business issued, experience in the year, cash receipts and payments, and changes in assumptions affected the performance and the carrying amount of insurance contracts. Introduction IFRS 17 Insurance contracts

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, reinsurance contracts Read more

Equity reserves – 1 Best complete read

Equity reserves

are part of owner’s equity

Equity is defined as follows: The residual interest in the assets of the enterprise after deducting all of its liabilities. Equity reserves are defined/described in several IFRS Standards, let’s see….

Equity consists of several components such as Share capital, Read more

Insurance modelling

Insurance modelling – The estimates of future cash flows should incorporate all reasonable and supportable information available without about amount, timing and uncertainty of those future cash flows. To accomplish this, an entity should estimate the expected value of the full range of Read more

Direct participating contracts

Direct participating contracts - Insurance contracts with direct participation features are insurance contracts that are investment-related service contracts

General model in Insurance contracts measurement

The general model of measurement of insurance contracts in IFRS 17 is based on estimates of the fulfilment cash flows and contractual service margin.

Contractual service margin

Contractual service margin – The fourth element of the building blocks in the general model is the contractual service margin (the CSM). This is a component of the asset or liability for the group of insurance contracts that represents the unearned profit the entity will recognise as it provides services in the future.

Here is how the contractual service margin fits into the general model of measurement of insurance contracts. The general model is based on the following estimation parameters:

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