An entity applies the principles in IFRS 15 on how to separate a contract with a customer that is partially within the scope of IFRS 15 and partially within the scope of other standards. The allocation of cash flows between the host insurance contract and the distinct goods or non-insurance services must be based on the stand-alone selling price of the components. In the absence of stand-alone selling prices that are directly observable, an entity must estimate the stand-alone selling prices to allocate the transaction price to each of the components. Cash outflows must be allocated to their related component, or, if not clearly related to one of the components, systematically and rationally allocated between components [IFRS 17 12].
1. Separating components from a stop-loss contract with claims processing services
An entity issues a stop loss contract to a policyholder (which is an employer). The contract provides health coverage for the policyholder’s employees, with these features:
- Insurance coverage of 100% for the aggregate claims from employees exceeding CU25m (the “stop-loss” threshold). The employer will self-insure claims from employees up to CU25m.
- Claims processing services for employees’ claims during the next year, regardless of whether these have exceeded the stop-loss threshold of CU25m. The entity is responsible for processing the health insurance claims of employees on behalf of the employer.
The entity considers whether to separate the claims processing services from the insurance contract. Similar services to process claims on behalf of customers are available in the market. The criteria for identifying distinct non-insurance services are met in this example because:
- Claims processing services, similar to those for employers’ claims on behalf of the employer, are sold as a stand-alone service without any insurance coverage.
- These services benefit the policyholder independently of the insurance coverage. Had the entity not agreed to provide those services, the policyholder would have to process its employees’ medical claims itself or engage other service providers.
- Cash flows associated with claims processing services are not highly interrelated with the cash flows of the insurance coverage, and the entity does not provide for a significant service of integrating claims processing services with the insurance components.
Accordingly, the entity separates the claims processing services (for all claims) from the insurance contract and accounts for them by applying IFRS 15.
2. Separating components from a life insurance contract with an account balance
An entity issues a life insurance contract with an account balance and receives a premium of CU1, 000 when the contract is issued. The account balance increases annually by voluntary amounts paid by the policyholder, and is credited with returns from specified assets and decreased by fees charged by the entity (e.g., asset management fees).
The contract promises to pay:
- A death benefit of CU5,000 plus the amount of the account balance, if the insured person dies during the coverage period
- The account balance, if the contract is canceled (i.e., there are no surrender charges)
The entity uses a claims processing department to process the claims received and an asset management department to manage investments. Other financial institutions offer investment products whose terms are equivalent to the account balance, but without the insurance coverage.
The existence of an investment product with equivalent terms indicates that the components may be distinct. However, if the right to provide death benefits provided by the insurance coverage either lapses or matures at the same time as the account balance is returned, the insurance and investment components are highly interrelated and therefore not distinct. Consequently, there would be no separation of an account balance and insurance contract, and the account balance would be accounted for by applying IFRS 17. Amounts related to the investment component would not be presented as insurance revenue or insurance service expenses.
An entity must undertake claims processing and asset management activities to fulfill the contract and does not transfer distinct goods or services to the policyholder simply because the entity performs these. Thus, the entity would not separate these components from the insurance contract.