IFRS 4 Insurance contracts

IFRS 4 Insurance contracts was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005. IFRS 4 will be replaced by IFRS 17 as of 1 January 2023.

Scope

IFRS 4 applies to:

  • Insurance contracts that an entity issues and reinsurance contracts that it
    holds
  • Financial instruments that an entity issues with a discretionary participation feature.
The following are examples of contracts that are insurance contracts, if the transfer of insurance risk is significant:
  • Insurance against theft or damage to property
  • Insurance against product liability, professional liability, civil liability or legal expenses
  • Life insurance and prepaid funeral expenses
  • Life-contingent annuities and pensions
  • Disability and medical cover
  • Surety bonds, fidelity bonds, performance bonds and bid bonds
  • Credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due
  • Product warranties (other than those issued directly by a manufacturer, dealer or retailer)
  • Title insurance
  • Travel assistance
  • Catastrophe bonds that provide for reduced payments of principal, interest or both if a specified event adversely affects the issuer of the bond
  • Insurance swaps and other contracts that require a payment based on changes in climatic, geological or other physical variables that are specific to a party to the contract
  • Reinsurance contracts.

The following are examples of items that are not  insurance contracts:

  • Investment contracts that have the legal form of an insurance contract but do not expose the insurer to significant risk
  • Contracts that pass all significant insurance risk back to the policyholder
  • Self-insurance i.e. retaining a risk that could have been covered by insurance
  • Gambling contracts
  • Derivatives that expose one party to financial risk but not insurance risk
  • A credit-related guarantee
  • Product warranties issued directly by a manufacturer, dealer or retailer
  • Financial guarantee contracts accounted for under IAS 39 Financial Instruments: Recognition and Measurement.
  • Does not address the accounting for financial assets held by insurers, but temporary exemption from the requirement to apply IFRS 9 is available until 1 January 2023 (R); and
  • Overlay approach permitted for designated financial assets.
Insurance accounting requirements
Embedded derivatives Unbundling of deposit components

As an exception to the rules in IAS 39, an insurer need not separate, and measure at fair value, a policyholder’s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), and if the exercise price differs from the carrying amount of the host insurance liability.

However, the requirement in IAS 39 does apply to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract.

Furthermore, that requirement also applies if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).

Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components.

Further guidance is provided in paragraphs 10 – 12 of IFRS 4.

IFRS 4 Insurance contracts

 

Recognition and measurement
Temporary exemption from some other IFRS
Paragraphs 10 – 12 of IAS 8 specify criteria for an entity to use in developing an accounting policy if no Standard applies specifically to an item.

IFRS 4 exempts an insurer from applying those criteria to its accounting policies for:

  1. insurance contracts that it issues (including related acquisition costs and related intangible assets, such as those described in paragraph 31 and 32); and
  2. reinsurance contracts that it holds.

IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts

Nevertheless, IFRS 4 does not exempt an insurer from some implications of the criteria in paragraphs 10 – 12 of IAS 8. Specifically, an insurer:
  1. shall not recognise as a liability any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the end of the reporting period (such as catastrophe provisions and equalisation provisions);
  2. shall carry out the liability adequacy test described in paragraphs 15 – 19;
  3. shall remove an insurance liability (or a part of an insurance liability) from its statement of financial position when, and only when, it is extinguished – that is, when the obligation specified in the contract is discharged or cancelled or expires;
  4. shall not offset:
    1. reinsurance assets against the related insurance liabilities, or
    2. income or expenses from reinsurance contracts against the expense or income from the related insurance contracts; and
  5. shall consider whether its insurance assets are impaired (paragraph 20).

 

Liability adequacy test Changes in accounting policies
At each reporting date, an insurer shall assess whether the carrying amount of an insurance liability is sufficient by comparing its carrying amount (less related deferred acquisition costs and related intangible assets) with the current estimates of future cash flows under the insurance contracts. Any deficiency is recognised in the profit or loss.

IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts IFRS 4 Insurance contracts

 

An insurer may change accounting policies for insurance contracts if, and only if the change makes the financial statements more relevant to the economic decision making needs of users without loss of reliability or relevance.

Relevance and reliability is judged by the criteria in IAS 8.

IFRS 4 provides more information on the following specific issues:IFRS 4 Insurance contracts

  • current interest rates – paragraph 24
  • continuation of existing practices – paragraph 25
  • prudence – paragraph 26
  • future investment margins – paragraphs 27 – 29
  • shadow accounting – paragraph 30

 

Discretionary participation features
The issuer of an insurance contract with a discretionary participation feature and a guaranteed element may but need not choose to recognise the elements separately with the following consequences:
  • if not recognised separately, the whole contract is classified as a liability
  • if recognised separately:
    • the guaranteed element is classified as a liability, and
    • the discretionary participation feature can be classified as either a liability or a separate component of equity
  • all premiums may be recognised as revenue without separating any portion applying to an equity component
  • If the contract contains an embedded derivative within the scope of IAS 39, apply IAS 39 to that embedded derivative
IFRS Disclosure questions
IFRS 4.36 Has the insurer disclosed information that identifies and explains the amounts in its financial statements arising from insurance contracts?
IFRS 4.37 Has the insurer disclosed:
  1. its accounting policies for insurance contracts and related assets, liabilities, income and expenses;
  2. the recognised assets, liabilities, income and expense (and, if it presents its statement of cash flows using the direct method, cash flows) arising from insurance contracts. Furthermore, if the insurer is a cedant, it shall disclose:
    1. gains and losses recognised in profit or loss on buying reinsurance, and
    2. if the cedant defers and amortises gains and losses arising on buying reinsurance, the amortisation for the period and the amounts remaining unamortised at the beginning and end of the period.
  3. the process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts described in (b). Where practical, has the insurer given quantified disclosure of those assumptions;
  4. The effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements; and
  5. Reconciliations of changes in insurance liabilities, reinsurance assets and, if any, related deferred acquisition costs?
IFRS 4.38 Has the insurer disclosed information to enable users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts?
IFRS 4.39

IFRS 4 Insurance contracts

IFRS 4 Insurance contracts

IFRS 4 Insurance contracts

IFRS 4 Insurance contracts

IFRS 4 Insurance contracts

IFRS 4 Insurance contracts

IFRS 4 Insurance contracts

Has the insurer disclosed:
  1. its objectives, policies and processes for managing risks arising from insurance contracts and the methods used to manage those risks;
  2. (deleted by the IASB)
  3. Information about insurance risk (both before and after risk mitigation by reinsurance), including information about:
    1. Sensitivity to insurance risk
    2. Concentrations of insurance risk, including a description of how management determines concentrations and a description of the shared
      concentrations and each concentration (e.g. type of insured events, geographical areas, or currency) and
    3. Actual claims compared with previous estimates. (i.e. claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year.
  4. Information about credit risk, liquidity risk and market risk that paragraphs 31 – 42 of IFRS 7 would require if the insurance contracts were within the scope of IFRS 7; and
  5. Information about exposures to market risk arising from embedded derivatives contained in a host insurance contract if the insurer is not required to, and does not, measure the embedded derivatives at fair value?
IFRS 4,39A Has the insurer disclosed either (a) or (b) to comply with paragraph 39(c)(i):
  1. a sensitivity analysis that shows how profit or loss and equity would have been affected if changes in the relevant risk variable that were reasonably possible at the end of the reporting period had occurred; the methods and assumptions used in preparing the sensitivity analysis; and any changes from the previous period in the methods and assumptions used? However, if an insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may meet this requirement by disclosing that alternative sensitivity analysis and the disclosures required by paragraph 41 of IFRS 7.
  2. qualitative information about sensitivity, and information about those terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of the insurer’s future cash flows?

 

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IFRS 4 Insurance contracts

IFRS 4 Insurance contracts