Insurances Classification and Measurement


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Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.

An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry on its own.

The following are contracts issued by insurance companies and their potential product classification and measurement model assignment under IFRS 17 Insurance contracts / IFRS 9 Financial instruments.

Contracts issued

Product classification

Measurement model

Term life insurance contracts

Insurance contracts

General model

Universal life insurance contracts

Insurance contracts without direct participation features

General model

Direct participating contracts

Insurance contracts with direct participation features

Variable fee approach

Investment contracts with direct participating features (DPF)

Insurance contracts without direct participation features

General model

Investment contracts without direct participating features

Financial instruments

Financial liabilities measured at FVTPL under IFRS 9 (refer to IFRS 9 4.2)

Automobile insurance

Insurance contracts

Premium allocation approach for policies issued (with coverage of one year or less)

General model for contracts acquired in the run-off period

Reinsurance contracts held

Product classification

Measurement model

Term life – quota share reinsurance

Reinsurance contract held

General model

Automobile third-party liability – excess of loss reinsurance

Reinsurance contract held

Premium allocation approach (with coverage of one year or less)

Definition of product classification



IFRS 17 2 ,
Appendix A – see IFRS Jargon),
IFRS 17 B2 – B25,
IFRS 17 BC78

Insurance contracts are contracts under which the insurer accepts significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. In making this assessment, all substantive rights and obligations, including those arising from law or regulation, are considered on a contract-by-contract basis. The insurer uses judgment to assess whether a contract transfers insurance risk (i.e. if there is a scenario with commercial substance in which the insurer has the possibility of a loss on a present value basis) and whether the accepted insurance risk is significant.

IFRS 17 B27 (a),
IFRS 17 B28

Contracts that have a legal form of insurance but do not transfer significant insurance risk and expose the insurer to financial risk are classified as investment contracts and follow financial instruments accounting under IFRS 9. Some investment contracts without direct participating features issued by the insurer fall under this category. Refer to IFRS 9 4.2.

IFRS 17 3 (c),
Appendix A – see IFRS Jargon)

Some investment contracts issued by the insurer contain direct participating features, whereby the investor has the right and is expected to receive, as a supplement to the amount not subject to the insurer’s discretion, potentially significant additional benefits based on the return of specified pools of investment assets. The insurer accounts for these contracts under IFRS 17.

IFRS 17 3 (c)

Investment contracts with DPF

The IASB has noted that such contracts have similar economic characteristics to an insurance contract (long duration, recurring premiums, the amount or timing of the return is contractually determined at the discretion of the issuer) and that they are commonly linked to the same pool of assets as, or share in the performance of, insurance contracts. These contracts are therefore accounted for under the IFRS 17 model, as long as the entity issues other insurance contracts. If an entity does not issue insurance contracts, it will apply IFRS 9 to account for investment contracts with DPF.

Under IFRS 4, entities are able to apply existing pre-IFRS 4 accounting practices for investment contracts with DPF, which, in some cases, are similar to accounting for investment contracts without DPF under IAS 39/IFRS 9 and IAS 18/IFRS 15. Under IFRS 17, this is no longer the option, and thus, the classification of contracts as investment contracts with or without DPF has significant impact on accounting for such contracts because IFRS 17 measurement requirements significantly differ from those applicable to investment contracts accounted for under IFRS 9 and IFRS 15.

Appendix A – see IFRS Jargon),
IFRS 17 117 (c)(iv),
IFRS 17 B101 – B102,
IFRS 17 B106 – B107

The insurer issues certain insurance contracts that are substantially investment-related service contracts where the return on the underlying items is shared with policyholders. Underlying items comprise specified portfolios of investment assets that determine amounts payable to policyholders. The insurer’s policy is to hold such investment assets.

An insurance contract with direct participation features is defined by the insurer as one which, at inception, meets the following criteria:

  • the contractual terms specify that the policyholders participate in a share of a clearly identified pool of underlying items;
  • the insurer expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and
  • the insurer expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items.

Investment components in Savings and Participating products comprise policyholder account values less applicable surrender fees.

The insurer uses judgment to assess whether the amounts expected to be paid to the policyholders constitute a substantial share of the fair value returns on the underlying items.

IFRS 17 B104

Insurance contracts with direct participation features are viewed as creating an obligation to pay policyholders an amount that is equal to the fair value of the underlying items, less a variable fee for service. The variable fee comprises the insurer’s share of the fair value of the underlying items, which is based on a fixed percentage of investment management fees (withdrawn annually from policyholder account values based on the fair value of underlying assets and specified in the contracts with policyholders) less the fulfilment cash flows that do not vary based on the returns on underlying items. The measurement approach for insurance contracts with direct participation features is referred to as the variable fee approach. The variable fee approach modifies the accounting model in IFRS 17 (referred to as the general model) to reflect that the consideration an entity receives for the contracts is a variable fee.

Direct participating contracts issued by the insurer are contracts with direct participation features where the insurer holds the pool of underlying assets and accounts for these groups of contracts under the variable fee approach.

Appendix A – see IFRS Jargon))

All other insurance contracts originated by the insurer are without direct participation features.

In the normal course of business, the insurer uses reinsurance to mitigate its risk exposures. A reinsurance contract transfers significant risk if it transfers substantially all the insurance risk resulting from the insured portion of the underlying insurance contracts, even if it does not expose the reinsurer to the possibility of a significant loss.

IFRS 17 5

All references to insurance contracts in these consolidated financial statements apply to insurance contracts issued or acquired, reinsurance contracts held and investment contracts with DPF, unless specifically stated otherwise.

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