[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].
An insurance contract issued by one entity (the reinsurer) to compensate another entity for claims arising from one or more insurance contracts issued by that other entity (underlying contracts).
The requirements for the assessment of significant insurance risk in a reinsurance contract are the same as for an insurance contract. However, a reinsurance contract transfers significant insurance risk if it transfers substantially all of the insurance risk resulting from the insured portion of the underlying insurance contract, even if it does not expose the reinsurer to the possibility of a significant loss.
Excess of loss reinsurance – In non-proportional reinsurance, the reinsurer pays that part only of each claim above a limit (excess of loss) or alternatively the whole excess of the total of all claims over an agreed portfolio limit (catastrophe stop loss) It is customary to fix a limit so that very few claims will concern the reinsurers. However, some small direct insurers fix a rather lower excess of loss limit so that a larger number of claims will exceed the limit; this is known as a “working cover”. One advantage may be that the reinsurer will provide guidance in claim settlement and possibly in other ways.
General reinsurance contract – A reinsurance contract that is not a life reinsurance contract.
General insurance contract – A reinsurance contract that is not a life insurance contract.
Inwards reinsurance – Reinsurance contracts written by reinsurers.
Life reinsurance contract – A life insurance contract issued by one insurer (the reinsurer) to compensate another insurer (the cedant) for losses on one or more contracts issued by the cedant.
Reinsurance assets – A cedant’s net contractual rights under a reinsurance contract.
Guaranteed benefits – Payments or other benefits to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the issuer.
Guaranteed element – An obligation to pay guaranteed benefits, included in a contract that contains a discretionary participation feature.
Liability adequacy test – An assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows.
Locked-in rate – In the General Model [IFRS 17 Insurance Contracts], the Contractual Service Margin (CSM) is accreted in each reporting period using the discount rate at inception of the insurance contract (i.e. a locked-in rate).
Net claims incurred – Direct claims costs net of reinsurance and other recoveries, and indirect claims handling costs, determined on a discounted basis.
The projected crediting method calculates discount rates on a basis that reflects the entity’s projected crediting rates (i.e. the rates that the entity intends to use to determine the policyholder cash flows).
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