Before the entity accounts for an insurance contract based on the guidance in IFRS 17, it should analyse whether the contract contains components that should be separated. IFRS 17 distinguishes between three different kinds of component that have to be accounted for separately if certain criteria are met:
- embedded derivatives;
- investment components; and
- promises to transfer distinct goods or distinct non-insurance services.
An entity applies IFRS 17 to all remaining components of the contract. Separation of other non-insurance components is prohibited.
Under IFRS 17 separation of any components (except the three components above) is prohibited unless it is explicitly required under the standard. This might have a significant effect on some entities. For example, a bank might issue loans that are waived if the borrower dies. Under IFRS 4, the bank could have voluntarily separated the contract into a loan accounted for at amortised cost, similar to other loans, and the insurance component accounted for under IFRS 4. Under the new standard, the loan element is unlikely to qualify as a distinct investment component, and so the entire contract will be required to be accounted for as an insurance contract.
Insurance contracts with riders
Insurers often issue contracts with riders. A rider is an add-on provision to a basic insurance policy that provides additional benefits to the policyholder at an additional cost. Riders can be either part of a contract at inception or added subsequently. Irrespective of when the riders are issued they can be priced at inception or subsequently in line with the prices at the date when the rider is issued. The accounting for riders depends on the terms of the contracts.
Riders that are separate policies or insurance contracts
If riders are issued and priced separately from the base insurance contracts, they should be viewed as separate insurance contracts for IFRS 17, unless required to be bundled together under the combination guidance.
Riders that are issued together with the main insurance contract and form part of a single insurance contract
If there is only one insurance contract with multiple provisions, and all of the riders are within the boundary of that contract, the contract will be viewed as one contract for IFRS 17.