Voluntary separation non-insurance components

Voluntary separation non-insurance components

The prohibition of Voluntary separation non-insurance components will have a significant impact on some accounting practices.

The IASB considered whether to permit an entity to separate a non-insurance component when not required to do so by IFRS 17, for example, some investment components with interrelated cash flows, such as policy loans. Such components may have been separated when applying previous accounting practices. However, the IASB concluded that it would not be possible to separate a component in a non-arbitrary way that is not distinct from the insurance contract nor would such a result be desirable [IFRS 17 BC114]. Voluntary separation non-insurance components

IFRS 17 applies to all components of insurance contracts that are not required to be separated. Whereas IFRS 17 specifically prohibits Voluntary separation non-insurance components that areVoluntary separation non-insurance components not required to be separated, IFRS 17 is silent on whether an entity is permitted to voluntarily separate ‘sub-insurance’ components of an insurance contract and to apply IFRS 17 to those components separately or together in new groups. This issue could be relevant in determining the groups under IFRS 17 (see ‘Portfolio of insurance contracts‘). Voluntary separation non-insurance components

Generally, IFRS 4 permits voluntary separation non-insurance components in an insurance contract where separation (referred to as “unbundling”) is not required [IFRS 17 10(b)]. Some entities used this option to voluntarily separate non-insurance components from their host insurance contracts and account for them under other IFRSs, for example, because their previous accounting policies applied under IFRS 4 required the separation of some of these components. In such cases, entities will have to assess whether separation of the non-insurance components is required under IFRS 17. Any such components not requiring mandatory separation will have to be accounted for together with the host insurance contract under IFRS 17.

Separating and accounting such non-insurance components using other applicable standards can:

  • improve transparency, Voluntary separation non-insurance components
  • make them more comparable to similar contracts that are issued as separate contracts, and
  • allow users of financial statement to better compare the risks undertaken by entities in different businesses or industries.

Here is an illustration of what could be separated: Voluntary separation non-insurance components

Voluntary separation non-insurance components

Separating non-insurance components into: Voluntary separation non-insurance components

  • Insurance component – IFRs 17 Voluntary separation non-insurance components
  • Non-distinct investment component – IFRS 17, but excluded from insurance revenue and service expenses
  • Distinct Investment Components – IFRS 9 Voluntary separation non-insurance components
  • Embedded Derivatives (that have to be separated) – IFRS 9 Voluntary separation non-insurance components

Distinct goods or non-insurance services

Goods or non-insurance service components are distinct if the policyholder can benefit from them on their own or with other resources that are readily available.

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If they are highly inter-related and the entity provides a significant service integrating it with the insurance component, they are not distinct.

Non-distinct investment components

Non-distinct (non-separable) investment components must not be included in insurance revenue and insurance service expenses reported.

An entity shall:

  • identify the investment components at the time revenue and incurred claims are recognised, and Voluntary separation non-insurance components
  • exclude the amounts so identified from insurance revenue and insurance service expenses, and Voluntary separation non-insurance components
  • disclose these amounts separately. Voluntary separation non-insurance components

Distinct investment components

An investment component represents the amounts that an insurance contract requires the entity to repay to a policyholder even if an insured event does not occur.

  • Entities will now be required to separate investment components if it is distinct.
  • An investment component is distinct if it is not highly inter-related and a contract with equivalent terms is or could be sold separately.

Embedded Derivatives

An entity shall apply IFRS 9 to determine whether there is an embedded derivative to be separated and, if there is, how to account for that derivative. (IFRS 9 11)

An embedded derivative is separated under IFRS 9 if and only if:

  • The embedded derivative is not closely related to the host contract, and
  • the embedded derivative on a standalone basis would meet the definition of a derivative and would be in scope of IFRS 9.

Application and calculation

No options are provided to voluntarily separate non-insurance components. Non-insurance components can only be separated when required.

  • Distinct goods or non-insurance services follow the revenue recognition standard (IFRS 15).
  • Embedded derivatives and distinct Investment components follow the financial instrument standard (IFRS 9).
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Allocating components:

  • Attribute cash flows to a separated embedded derivative or to a distinct investment component on a stand-alone basis.
  • Separate discounts/supplements and cash flows (including expenses and acquisition costs) between insurance and goods & service on a “rational and consistent” basis

Examples: separating components

Separating component from a life insurance contract with an account balance

Fact Pattern

A life insurance contract has the following terms:

  • the policyholder pays a premium of 1,000 at contract inception;
  • the account balance is increased by voluntary amounts paid by the policyholder, adjusted by investment returns from specified assets and reduced by asset management fees and an insurance charge;
  • the contract matures on the earlier of the policyholder’s death or contract cancellation.

The pay-out comprises:

  • a death benefit of 5,000 if the policyholder has died; plus
  • an amount equal to the account balance, whether the policyholder has died or cancelled the contract.
  • A competitor sells an investment product equivalent to the account balance, but without the insurance coverage.

Analysis

Is the account balance separable?

  • The fact that a comparable investment product is sold by another financial institution indicates that the components may be distinct.
  • However, if the right to death benefits provided by the insurance coverage either lapses or matures at the same time as the account balance, the insurance and investment components are highly interrelated and are therefore not distinct.
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Consequently, the account balance would not be separated from the insurance contract and would be accounted for applying IFRS 17.

Separating components from a stop-loss contract with claims processing services

Fact Pattern

An entity issues a stop-loss contract to an employer. The contract provides health coverage for the policyholder’s employees and has the following features:

  • insurance coverage of 100% for the aggregate claims from employees exceeding 25 million (the ‘stop-loss threshold’). The employer will self insure claims from employees up to 25 million.
  • claims processing services for employees’ claims during the next year, regardless of the stop-loss threshold of 25 million. The entity is responsible for processing the health insurance claims of the employees on behalf of the employer.
  • The entity considers whether to separate the claims processing services. The entity notes that similar services to process claims on behalf of customers are sold on the market.

Analysis

Is the claim processing services separable?

The criteria for distinct non-insurance are met in this example:

  • similar claims processing services are sold as a standalone service; and
  • the services benefit the policyholder independently of the insurance coverage.
  • the cash flows associated with the claims processing services are not highly interrelated with the insurance coverage.
  • entity does not provide a significant service of integrating the claims processing services with the insurance components.

The entity shall separate the claims processing services from the insurance contract and accounts for them applying IFRS 15.

Voluntary separation non-insurance components

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