Islamic University – Gaza ‫الجامعة االسالمية – غزة‬

Faculty of commerce ‫كلية التجارة‬

Department of Accounting ‫المحاسبة باللغة االنجليزية‬

The applying of IFRS 4 insurance contracts in the

insurance companies of Gaza

A Graduation Research
Presented to the
Faculty of Commerce
The Islamic University of Gaza

By

Mohammed Alsafadi Mohammed Abualola

Supervisor's name
Mr. Salah Shubair

Date

August 2012

Page | 1
‫‪A Holy Qur'an Verse‬‬

‫}وقل اعملوا فسيرى هللا عملكم ورسوله والمؤمنين{‬

‫صدق هللا العظيم‬

‫سورة التوبة – اآلية ‪501‬‬

‫‪Page | 2‬‬
 Dedication
We dedicate this work to our lovely
Palestine, to second home of Islamic
university, and to our parents, who
sacrificed everything in their life for us,
and also we thank them for pushing us to
success. For all of Those, Who are
inspiring us and show us our way

Page | 3
 Acknowledgement

First of all, we would thank god for guiding us to complete

this research to the fullest
We want to thank everyone help and participated in making
this study starting from our honorable:
Mr. Salah Shubair
Who put a lot of faith in our capabilities and encouraged us to
complete this study
We thank all of our teachers in the faculty of commerce and
our colleagues and friends for their support

Page | 4
Abstract:

This paper examines the application of IFRS insurance contracts in Gaza insurance
organizations. This standard requires entities that issues insurance contracts to
make limited improvements to accounting by insurers for insurance contracts, and
to the disclosure that identifies and explains the amounts in an insurer’s financial
statements arising from insurance contracts and helps users of those financial
statements understand the amount, timing and uncertainty of future cash flows
from insurance contracts.

Insurance organizations like Trust and Almoltazim Company have a huge interest
in using this IFRS standard especially in these days in rising competition to make
more accurate, comprehensive and timely financial statement information to attract
investors. This is of vital case for organizations to stay in business and to grow
wider to reach the global market.

This study aims to explore organizations’ usage of IFRS for insurance contracts
and to assess the impact of its applications.

Page | 5
Table of Contents

Abstract 5

Table of contents 6

Chapter 1 (Research Proposal) 7

Introduction 7

Statement of problem 8

Objectives 9

Chapter 2 (Literature review)10

Research background 10

Philosophy of insurance 11

Capital Market Authority of Palestine 12

Functions of the capital market 14

Tasks assigned to the Capital Market Authority 14

The responsibilities of the capital market authority 15

Types of insurance 16

Insurance companies in Palestine 16

Legal reference for the insurance system in Palestine 17

Chapter 3 (IFRS 4 Insurance Contracts) 18

Insurance contracts 19

Types of insurance contracts 19

IFRS 4 project 25

Presentation 29

References 30

Results and recommendations 31

Appendix (Questionnaire and Quantitative analysis) 32

Page | 6
Introduction:

The IFRS 4 (International Financial Standard number 4) for the preparation of

financial statements is a standard issued by the International Accounting Standards
Board about insurance contracts. It requires insurance companies to comply with
international standards for financial reporting in order to give limited
improvements to accounting practice and to understand the salient aspects that are
related to accounting insurance. The IAS 39 (International Accounting Standard
39) apply on those contracts that transfer financial risk, mainly, such as credit
derivatives and some financial reinsurance contracts, we the international financial
reporting stander number 4:

1)To ensure the products covered by each of IAS 18 and IAS 37, assets and
obligations of employers under the plans, employee benefits, which covered all of
IAS 19 and IAS reporting Finance 2.

2) And that payment is contingent receivable or payable in a business combination,

which is covered by the international standard for IFRS 3 "Business
Combinations” which means that the international standard for the preparation of
financial statements is a standard issued by the international Accounting Standards
Board on insurance contracts. The objective of this IFRS is to specify the financial
reporting for insurance contracts by any entity that issues such contract until the
board completes the second phase of its project on insurance contracts, In
particular, this IFRS requires:

1. limited improvement to accounting by insurers for insurance contracts.

2. Disclosure that identify and explains the amount in an insurer s financial

statements arising from insurance contracts and help users of those financial
statement understand the amount, timing and uncertainty of future cash flows from
insurance contracts.

The insurance contact: is a contract under which one party (insurance company)
carries the risk of a significant insurance from another party (the policyholder) by
agreeing to compensate the policyholder for a specified future event is certain to
fall (from the insured event) adversely affects the policyholder.
Page | 7
We will explain in this research paper how the insurance companies in Gaza apply
the IFRS 4, the effects and the benefits of this stander for them.

Statement of the problem:

The insurance industry is a huge field that affects the economy in the world
heavily. It operates hundreds of accounting procedures monthly, so they must use a
special accounting system that comply with the international stander which is IFRS
(4) that specify their financial statements with some improvements and disclosures.

Therefore, the study problem is considered in this simple question: Do the

insurance company in GAZA city apply the IFRS 4 in there accounting system,
and how?

Significance of the project (work):

Insurance system became the most prominent issues of concern for accounting
firms, So IFRS had to issue a stander related to this subject.

From this point we can highlight several point describing the importance for this
research:

1) This study seeks to draw attention to the need for an accounting standard is
implemented in insurance companies.
2) This study seeks to clarify a vision of a comprehensive, modern practice of
the IFRS system in insurance companies.
3) This study highlights the importance of how accountants can deal with the
IFRS system professionally in Gaza.
4) This study will show the opportunity for Gaza companies to reach the global
business through following the IFRS.

Page | 8
Objectives
Main objective
To know whether the insurance companies in Gaza apply the IFRS 4, and the
effects of this stander on the financial statements.

Specific objectives:
1) To explain IFRS 4 and describe its impacts on the insurance companies.
2) To study the system in which insurance company apply IFRS 4.
3) To encourage the insurance company in Gaza to apply this stander.

Page | 9
Chapter 2: Literature review

Research back ground, what is insurance?

Palestinian National Authority has commenced its oversight of the insurance

industry in Palestine since 1993, and the expansion of the geographical scope of
responsibility for the insurance sector in 1994. Under the agreement the transfer of
powers, the Palestinian National Authority is the entity authorized by the law and
the supervisors in the insurance field. That agreement includes the licensing of
insurance agents to the insurers and the supervisors on their activities. Palestinian
laws also have kept compensation system mandatory for absolute road accident
victims. A lot of local and international insurance company operated in Palestine,
until 2008 it was 10 insurance company that are working in different kinds of
insurance. The insurance sector has suffered from the absence of the Palestinian
legislation and mechanisms of supervision and control of government for a long
time in the absence of a Palestinian law of insurance, and suffered from the chaos
of work and poor insurance culture. Until the Capital Market Authority became a
legal entity authorized to supervise, control and organization of the insurance
sector lately in 2004, and helped the issuance of the Palestinian Legislative Council
to the Insurance Act to begin to organize the insurance sector in early 2006.
The Capital Market Authority has worked on the issuance of secondary legislation,
and began its work in an orderly fashion for the advancement of the insurance
industry to Palestinians which constitute about 2% of GDP. Despite the setback
suffered in 2007 of the insurance sector in Gaza because of the industry disaster,
although the insurance sector has achieved a growth of (28%) for the year 2008.

Page | 10
Philosophy of insurance:
The establishment of insurance and its definition came due the fear of human being
that he always looking for safety, so he didn’t stop incapable of overcoming the
risks that surround him and threat his life, family and his car. And from the past the
humans searched for ways to protect him from those risks and to minimize the
damage that caused by it, doing all what he can and cooperating with other humans
that bear the same risks, that comes of that idea that if not bearing danger is
impossible then at least minimizing its bad effects. At this point comes the need for
insurance and the emerging of the many types of insurance, and the emerging of
insurance organizations and institutes that work in insurance field. So insurance
based on the idea of the dispersal of the loss and distributing it so that the danger
can be minimized to a small parts that every individual bears. So insurance is (The
idea or the art of distributing the damage that individuals suffer or multiple
numbers of persons that bears the same risks). The idea of distributing the damage
on groups of people is older than the emerging of the insurance as a specialized
organization. And the oldest type of insurance is marine insurance, merchants in
old china were distributing the merchandize that needed to be teleported by sea to a
big number of parts that transported by multiple ships, so the overcome the
possibility of the drowning of the all merchandize. This operation is not insurance
but a way to distribute the danger, while overland insurance didn’t emerge until the
end of the nineteenth century and the first quarter of the twentieth century,
specifically in Belgium, where a law issued in 1874, then in Switzerland then in
Germany, while French insurance law issued in 1930. While Egypt where the first
Arabic countries that issue a law that organize insurance procedures and that was
in the year 1936.Then in 1926 a law where issued.

Page | 11
Insurance contract under the Palestinian law (20) for the year 2005 some
definitions are important according to this law:
1) Insurance contract: Any agreement or undertaking committed by which the
insurer to lead to the insured or beneficiary who spoke on condition of insurance in
favor of a sum of money or income or salary, or any offset other financial in the
event of an accident or check the risk set forth the contract, in return premium or
any payment other financial performed insured for the insured.
2) The insurer: The insurance company or a branch of a foreign insurance company
that had the authority to practice insurance work according to the provisions of this
law.
3) The insured: The person that signed the insurance contract with the insurer or
the beneficial that earned the insurance contract rights.
4)Reinsurance contract: Any agreement or undertaking between the insurance
company of origin (the company's assignor) and a company or other companies
(reinsurers) movement under which the company assignor to reinsurers all or some
of the dangers that have committed themselves to others under an insurance
contract took upon itself at all, and in exchange for a certain amount paid by the
company assignor to reinsurers known as the reinsurance premium, and is
committed forwarders insurance under this contract indemnify the Company
assignor of what may inflict harm to others that have secured against it originally.

Capital Market Authority of Palestine:

The main goal for Capital Market Authority is to organize and develop the
insurance sector in Palestine. The Capital Market Authority of Palestine is the
entity authorized legally to develop detailed policies designed to promote and
develop the insurance sector and prepare the necessary regulations. And provide
the appropriate environment for the growth and progress of the insurance industry
to the specified year on the overall economic activity in Palestine, in cooperation
and coordination with the concerned authorities. It’s the public administration for
insurance in the supervision and control over the insurance business and work to
develop this sector and the preparation of regulations, instructions and take the
necessary procedures to do so. The public administration has been able to build the
basic function for the management, and translate its ambitions into actions applied
Page | 12
in the ground. So its issue the rules, regulations, decisions and orders which are
compatible with the insurance industry in global markets. The public
administration for insurance continued on the path of cooperation and the exchange
of views and ideas with those who for the insurance sector in order to overcome
this difficult phase, and worked on the concerted efforts of all those who are
involved in this vital sector. And remained in constant contact with all the
components of this sector, and worked on the basis of the Law Commission and
the Insurance Act and the relevant secondary legislation to achieve the objectives
of the High Commissioner. In this aspect, as well the Department continues to
organize the insurance sector and its supervision to offer an appropriate
environment to develop and strengthen its role in the national economy through:
- Develop special policies to promote and develop the insurance sector and prepare
the necessary regulations to implement them in cooperation and consultation with
the competent authorities.
- Do whatever it takes to provide the appropriate environment for growth and
advancement of the insurance sector.
- Preserving the rights and interests of insurers and the users of insurance services
and sophistication of these services to ensure the protection of the rights of all
parties.
- Encourage and support the development of awareness of insurance programs.
- The continued development of the internal system in line with market
developments. And work was continuing to develop plans to ensure the
development and organization of the insurance sector and raise awareness of
insurance to the members of the community, and the cooperation with all the
components of the insurance sector, is also seeking its vision of future to improve
its performance and raise the capacity and efficiency of control in accordance with
best international standards and practices through the development of legislation,
rules and systems of internal system achieving efficiency in the performance of its
supervisory role.

Functions of the capital market (Act 4 Chapter 3):

The Capital Market Authority organizes the insurance procedures that are
Page | 13
mentioned in this law through:
1. Supervision and control over the application of this law provisions and any laws,
regulations and instructions related to insurance business, and to take actions,
decisions and instructions to do so.
2. Development of detailed policies to promote and develop the insurance sector
and prepare the necessary regulations to implement them and to take actions and
decisions necessary to do so within the limits of its powers specified in this Law, in
cooperation and consultation with the concerned authorities.
3. Do whatever it takes to provide the appropriate environment for growth and
advancement of the insurance sector to the benefit of economic activity in
Palestine, in cooperation and coordination with the concerned authorities.
4. Protect the rights of insurers and beneficiaries of insurance services, and
sophistication of these services and to achieve full competition among the insurers
in order to ensure the protection of their rights and interests through the
implementation of laws, regulations, instructions and policy to develop the
insurance sector.

Tasks assigned to the Capital Market Authority (Act 5 Chapter 3 in

Palestinian Law)

Working under the acts of capital market authority, and under the decisions of the
council, it does the following:
1. Formulating system includes provisions and fees grants the authority to
the insurance company to practice insurance procedures, and the documents
and the instructions to have it with following the acts mentions in chapter 7
in this law.
2. Formulating a system to impose fees for services that offered by the
authority to the companies.
3. Formulating the foundations the calculations of the insurance
commitments and the protections for it, and stating the way of analyzing
company’s assets.
4. Formulating instructions that grant the insurance companies to take back
insurance contract.

Page | 14
 5. Issuing and making journals and yearly statics about insurance sector.
And media programs for teaching the businessmen with the importance of
this services, and its overall impacts on the industry.
6. Issuing a yearly report on the activities and the achievements of the
authority, and what is new in the insurance sector. The report also includes
the future plans for the authority on what belongs to the insurance sector.
7. Formulating the instructions to the declaring of the foundations that must
be followed to the organizations of the accounting journals, logs and the
documents for the insurance companies.
8. Publishing the data and information that are mentioned in the journals and
the logs of the company in a way that is recommended by the authority for
the reporting to the concerned authorities.

According to the legislative authority the capital market has these

responsibilities : (Act 6 Chapter 3)

1. Prevent or restrict the Company's investments in certain areas.

2. Set the conditions for granting authority for agents, insurance brokers and
insurance experts and determine the qualifications and experience required,
including life insurance specialists.
3. Issue orders for companies, agents and third parties to make them comply with
the provisions, regulations and instructions under the threat of sanctions provided
in this law.
4. Appointment of a specialist in life insurance or any other type of insurance, or
an auditor to audit the work of any company and evaluate their situation and report,
and the Company shall pay auditing fees.
5. Not to approve the appointment of General Manager of the Company or any of
the key staff or the insurance agent or the auditor because of lack of competence or
expertise.
6. Preparation of rules, regulations required by insurance companies operating in
Palestine for re-insurance to the domestic re-insurance companies and determines
the foundations and re-insurance rates to be applied.
7. Preparation of regulations to impose compulsory insurance against certain risks
and to identify conditions and general terms and limits of liability in it.
Page | 15
8. Formulating professional rules that can be followed by all insurance companies,
agents and third parties when establishing the insurance contract provisions and
when dealing with the insured parties.

Types of insurance: (Act 3 Chapter 1)

Marine Insurance
1. Securing maritime, vessels securing the hull.
Insurance responsibilities associated with it.
2. Aviation insurance, Airframe, Pilots, Passenger
Civil Liability
3. Secure transport of goods by sea, air and land.
4. Secure transport of goods by road (to separate shipments).
5. Insurance of goods transported (to secure the annual amounts).
Local insurance company:
Each company will be established in Palestine and registration with the Registrar
of Companies for the purposes of doing insurance business.

Insurance companies in Palestine:

In mid-1994, began to insurance companies to exercise their activities in the
Palestinian territories through the re-opening of branches or create new companies
in the Palestinian Territory amounted to companies operating in Palestine and
winning come under the definition by the Capital Market Authority of Palestine
(the regulator for insurance companies) until the end of 2009, ten companies are:
1. Company Arab Insurance Establishment.
2. National Insurance Company.
3. Orient Insurance Company.
4. Trust International Insurance.
5. Insurance company Palestine.
6. Eligibility for group insurance.
7. Arab Company for life insurance and accident.
8. The company's U.S. Life Insurance
9. Palestinian takaful insurance.
10. Palestine Company for mortgage financing.

Page | 16
The companies listed on the Palestine Securities Exchange is the four companies
until the end of 2009 and the inclusion of Palestine Insurance in May 2010, and
these companies:
• Al Ahlia Insurance Group
• Orient Insurance Company
• Trust Insurance
• National Insurance Company
• Insurance company Palestine

Company which is under study:

 Al AHLIA Insurance Group.
 AlMoltazim.
 Trust

Legal reference for the insurance system in Palestine:

1. The Law of the Capital Market Authority Palestinian number 13 of
2004.
2. The Insurance Act number 20 of 2005.
3. Regulations, directives, decisions and orders issued under laws.
4. http://pif.org.ps/atemplate.php?id=96

Chapter 3 – IFRS 4: Insurance Contracts

Page | 17
 Insurance contracts

The objective of this IFRS is to specify the financial reporting for insurance
contracts by any entity that issues such contracts (described in this IFRS as an
insurer) until the Board completes the second phase of its project on insurance
contracts. In particular, this IFRS requires:
(a) Limited improvements to accounting by insurers for insurance contracts.
(b) Disclosure that identifies and explains the amounts in an insurer’s financial
statements arising from insurance contracts and helps users of those financial
statements understand the amount, timing and uncertainty of future cash flows
from insurance contracts.
An insurance contract is a contract under which one party (the insurer) 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 IFRS applies to all insurance contracts (including reinsurance contracts) that
an entity issues and to reinsurance contracts that it holds, except for specified
contracts covered by other IFRSs. It does not apply to other assets and liabilities of
an insurer, such as financial assets and financial liabilities within the scope of IAS
39 Financial Instruments: Recognition and Measurement. Furthermore, it does not
address accounting by policyholders.
The IFRS exempts an insurer temporarily from some requirements of other IFRSs,
including the requirement to consider the Framework in selecting accounting
policies for insurance contracts. However, the IFRS:
(a) prohibits provisions for possible claims under contracts that are not in existence
at the reporting date (such as catastrophe and equalization provisions).
(b) Requires a test for the adequacy of recognized insurance liabilities and an
impairment test for reinsurance assets.
(c) Requires an insurer to keep insurance liabilities in its balance sheet until they
are discharged or cancelled, or expire, and to present insurance liabilities
without offsetting them against related reinsurance assets.

The IFRS permits an insurer to change its accounting policies for insurance
contracts only if, as a result, its financial statements present information that is
more relevant and no less reliable, or more reliable and no less relevant. In
particular, an insurer cannot introduce any of the following practices, although it
may continue using accounting policies that involve them:
(a) Measuring insurance liabilities on an undiscounted basis.

Page | 18
(b) Measuring contractual rights to future investment management fees at an
amount that exceeds their fair value as implied by a comparison with current
fees charged by other market participants for similar services.
(c) Using non-uniform accounting policies for the insurance liabilities of
subsidiaries.

The IFRS permits the introduction of an accounting policy that involves

remeasuring designated insurance liabilities consistently in each period to
reflect current market interest rates (and, if the insurer so elects, other current
estimates and assumptions). Without this permission, an insurer would have
been required to apply the change in accounting policies consistently to all
similar liabilities.

The IFRS requires disclosure to help users understand:

(a) The amounts in the insurer’s financial statements that arise from insurance
contracts.
(b) The amount, timing and uncertainty of future cash flows from insurance
contracts.

Insurance Contracts background:

In insurance, the insurance contract is a policy between the insurer and the insured,
known as the policyholder, which determines the claims which the insurer
is legally required to pay. In exchange for payment, known as the premium, the
insurer pays for damages to the insured which are caused by covered perils under
the policy language. Insurance contracts are designed to meet specific needs and
thus have many features not found in many other types of contracts.

Types of insurance contracts:

Insurance can cover any potential risk. Specific kinds of risks which rise a claim
are called perils. Insurance contract policy will define clearly what perils will be
covered by the insurance company. The following are the different types of
insurance:

Auto insurance
Auto insurance protects the policyholder against financial loss in the event of an
incident involving a vehicle they own, such as in a traffic collision.

Page | 19
Coverage typically includes:
1. Property coverage, for damage to or theft of the car;
2. Liability coverage, for the legal responsibility to others for bodily injury or
property damage;
3. Medical coverage, for the cost of treating injuries, rehabilitation and
sometimes lost wages and funeral expenses.

Gap insurance
Gap insurance covers the excess amount on your auto loan in an instance where
your insurance company does not cover the entire loan. Depending on the
companies specific policies it might or might not cover the deductible as well. This
coverage is marketed for those who put low down payments, have high interest
rates on their loans, and those with 60 month or longer terms. Gap insurance is
typically offered by your finance company when you first purchase your vehicle.
Most auto insurance companies offer this coverage to consumers as well.

Home insurance
Home insurance provides coverage for damage or destruction of the policyholder's
home. In some geographical areas, the policy may exclude certain types of risks,
such as flood or earthquake that require additional coverage. Maintenance-related
issues are typically the homeowner's responsibility. The policy may include
inventory, or this can be bought as a separate policy, especially for people who rent
housing. In some countries, insurers offer a package which may include liability
and legal responsibility for injuries and property damage caused by members of the
household, including pets.

Health insurance
Health insurance policies cover the cost of medical treatments. Dental insurance,
like medical insurance protects policyholders for dental costs. In the US and
Canada, dental insurance is often part of an employer's benefits package, along
with health insurance.
Accident, sickness and unemployment insurance
 Disability insurance policies provide financial support in the event of the
policyholder becoming unable to work because of disabling illness or injury. It
provides monthly support to help pay such obligations as mortgage
loans and credit cards. Short-term and long-term disability policies are
available to individuals, but considering the expense, long-term policies are
Page | 20
 generally obtained only by those with at least six-figure incomes, such as
doctors, lawyers, etc. Short-term disability insurance covers a person for a
period typically up to six months, paying a stipend each month to cover medical
bills and other necessities.
 Long-term disability insurance covers an individual's expenses for the long
term, up until such time as they are considered permanently disabled and
thereafter. Insurance companies will often try to encourage the person back into
employment in preference to and before declaring them unable to work at all
and therefore totally disabled.
 Disability overhead insurance allows business owners to cover the overhead
expenses of their business while they are unable to work.
 Total permanent disability insurance provides benefits when a person is
permanently disabled and can no longer work in their profession, often taken as
an adjunct to life insurance.
 Workers' compensation insurance replaces all or part of a
worker's wages lost and accompanying medical expenses incurred because of a
job-related injury.

Casualty
Casualty insurance insures against accidents, not necessarily tied to any specific
property. It is a broad spectrum of insurance that a number of other types of
insurance could be classified, such as auto, workers compensation, and some
liability insurances.
 Crime insurance is a form of casualty insurance that covers the policyholder
against losses arising from the criminal acts of third parties. For example, a
company can obtain crime insurance to cover losses arising
from theft or embezzlement.
 Political risk insurance is a form of casualty insurance that can be taken out
by businesses with operations in countries in which there is a risk
that revolution or other political conditions could result in a loss.

Life
Life insurance provides a monetary benefit to a decedent's family or other
designated beneficiary, and may specifically provide for income to an insured
person's family, burial, funeral and other final expenses. Life insurance policies
often allow the option of having the proceeds paid to the beneficiary either in a
lump sum cash payment or an annuity.

Page | 21
Burial insurance
Burial insurance is a very old type of life insurance which is paid out upon death to
cover final expenses, such as the cost of a funeral.

Property
Builder's risk insurance insures against the risk of physical loss or damage to
property during construction.
Earthquake insurance is a form of property insurance that pays the policyholder in
the event of an earthquake that causes damage to the property. Most ordinary home
insurance policies do not cover earthquake damage. Earthquake insurance policies
generally feature a high deductible. Rates depend on location and hence the
likelihood of an earthquake, as well as the construction of the home.
Flood insurance protects against property loss due to flooding. Many insurers in
the US do not provide flood insurance in some parts of the country. In response to
this, the federal government created the National Flood Insurance Program which
serves as the insurer of last resort.
Terrorism insurance provides protection against any loss or damage caused
by terrorist activities. In the US in the wake of 9/11
Crop insurance may be purchased by farmers to reduce or manage various risks
associated with growing crops. Such risks include crop loss or damage caused by
weather, hail, drought, frost damage, insects, or disease.

Liability
Liability insurance is a very broad superset that covers legal claims against the
insured. Many types of insurance include an aspect of liability coverage. For
example, a homeowner's insurance policy will normally include liability coverage
which protects the insured in the event of a claim brought by someone who slips
and falls on the property; automobile insurance also includes an aspect of liability
insurance that indemnifies against the harm that a crashing car can cause to others'
lives, health, or property. The protection offered by a liability insurance policy is
twofold: a legal defense in the event of a lawsuit commenced against the
policyholder and indemnification (payment on behalf of the insured) with respect
to a settlement.
Public liability insurance covers a business or organization against claims should
its operations injure a member of the public or damage their property in some way.
Environmental liability insurance protects the insured from bodily injury, property
damage and cleanup costs as a result of the dispersal, release or escape of
pollutants.

Page | 22
Errors and omissions insurance is business liability insurance for professionals
such as insurance agents, real estate agents and brokers, architects, third-party
administrators (TPAs) and other business professionals.
Prize indemnity insurance protects the insured from giving away a large prize at a
specific event. Examples would include offering prizes to contestants who can
make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.

Credit
Credit insurance repays some or all of a loan when certain circumstances arise to
the borrower such as unemployment, disability, or death.
 Mortgage insurance insures the lender against default by the borrower.
Mortgage insurance is a form of credit insurance, although the name "credit
insurance" more often is used to refer to policies that cover other kinds of debt.
 Many credit cards offer payment protection plans which are a form of credit
insurance.
 Trade credit insurance is business insurance over the accounts receivable of
the insured. The policy pays the policy holder for covered accounts receivable
if the debtor defaults on payment.

Other types
All-risk insurance is an insurance that covers a wide-range of incidents and perils,
except those noted in the policy. All-risk insurance is different from peril-specific
insurance that cover losses from only those perils listed in the policy.
Protected self-insurance is an alternative risk financing mechanism in which an
organization retains the mathematically calculated cost of risk within the
organization and transfers the catastrophic risk with specific and aggregate limits
to an insurer so the maximum total cost of the program is known. A properly
designed and underwritten Protected Self-Insurance Program reduces and stabilizes
the cost of insurance and provides valuable risk management information
Reinsurance is a type of insurance purchased by insurance companies or self-
insured employers to protect against unexpected losses. Financial reinsurance is a
form of reinsurance that is primarily used for capital management rather than to
transfer insurance risk.
Social insurance can be many things to many people in many countries. But a
summary of its essence is that it is a collection of insurance coverages (including
components of life insurance, disability income insurance, unemployment
insurance, health insurance, and others), plus retirement savings, that requires
participation by all citizens. By forcing everyone in society to be a policyholder
and pay premiums, it ensures that everyone can become a claimant when or if

Page | 23
he/she needs to. Along the way this inevitably becomes related to other concepts
such as the justice system and the welfare state.

Stop-Loss (Excess) Insurance

Stop-loss insurance (also known as excess insurance) is a product that provides
protection against catastrophic or unpredictable losses. It is purchased by
employers who have decided to self-fund their employee benefit plans, but do not
want to assume 100% of the liability for losses arising from the plans. Under a
stop-loss policy, the insurance company becomes liable for losses that exceed
certain limits called deductibles. 

Closed community self-insurance

Some communities prefer to create virtual insurance amongst themselves by other
means than contractual risk transfer, which assigns explicit numerical values to
risk. A number of religious groups, including the Amish and some Muslim groups,
depend on support provided by their communities when disasters strike. The risk
presented by any given person is assumed collectively by the community who all
bear the cost of rebuilding lost property and supporting people whose needs are
suddenly greater after a loss of some kind. In supportive communities where others
can be trusted to follow community leaders, this tacit form of insurance can work.
In this manner the community can even out the extreme differences in insurability
that exist among its members. 

Insurance companies may be classified into two groups:

 Life insurance companies, which sell life insurance, annuities and pensions
products.
 Non-life, general, or property/casualty insurance companies, which sell other
types of insurance.

In most countries, life and non-life insurers are subject to different regulatory
regimes and different tax and accounting rules. The main reason for the distinction
between the two types of company is that life, annuity, and pension business is
very long-term in nature — coverage for life assurance or a pension can cover risks

Page | 24
over many decades. By contrast, non-life insurance cover usually covers a shorter
period, such as one year.

IFRS 4 Project
Because of the importance of insurance contracts on accounting system, and the
growing changes in its procedures, the international accounting standard
committee launched a project in 1994 on insurance contracts into two phases.

The project on insurance contract needed because of the following reasons:

(a) Some practices have developed in a piecemeal fashion over many years and do
not provide a coherent framework for dealing with more complex contracts (such
as multi-line or stop-loss contracts) or resolving emerging issues with new types of
insurance contract.
(b) Accounting methods have sometimes been tailored more to meeting the needs
of insurance regulators than to meeting the sometimes different needs of investors
and other capital providers.
(c) Some practices used by insurers differ from those used by other entities,
particularly other financial institutions, such as banks and fund managers, but there
is not a sound reason for all those differences. These differences impede
comparisons between insurers and other financial institutions. They can also mean
that financial conglomerates produce financial statements that are internally
inconsistent.

Insurance contracts create a bundle of rights and obligations that generate a

package of cash inflows and cash outflows, including:
(a) Premiums received from the customer.
(b) Benefits paid to policyholders to satisfy valid claims.
(c) Costs of investigating whether claims are valid and of settling those claims
(claims handling costs).
(d) Costs of servicing contracts during their life.
(e) Additional payments to holders of participating insurance contracts (e.g.
dividends and bonuses).
(f) Interest credits to holders of account-driven contracts, such as the contracts
known in some countries as universal life contracts.
(g) Payments resulting from the options, guarantees and other derivatives
embedded in many insurance contracts.

Page | 25
Insurance contracts types:
The simplest insurance contracts, for example many non-life insurance contracts,
provide only insurance coverage. However, many other insurance contracts blend
together several types of cash flows arising from various components that would, if
issued as free-standing contracts. Be subject to a variety of accounting treatments.

Those components include:

(a) Pure insurance, as noted above.
(b) Pure deposits, for example financial instruments whereby an entity receives a
fixed sum and undertakes to repay that sum with fixed interest on a fixed date.
(c) Non-insurance services, such as pension administration, asset management or
custody services, for example of mutual fund assets.

If an insurer applied the revenue recognition model then he would:

(a) Identify the separate performance obligations in the contract, and allocate the
revenue element across those performance obligations to determine the transaction
price for each performance obligation.
(b) Measure those performance obligations that remain unsatisfied at the amount of
transaction price that is allocated to those performance obligations.
(c) Recognize an additional liability if a performance obligation is onerous.
(d) Recognize revenue as the insurer satisfies a performance obligation by
providing insurance coverage. Typically, revenue would be recognized
continuously over the coverage period.

However, for some types of insurance contract, it would be much more difficult to
apply the revenue recognition model and the results would be of limited use to
users. Examples of some of the problem areas are:

(a) Stop-loss contracts and some contracts with significant deductibles.

(b) Contracts for which the expected cost of an insured event is likely to fluctuate
both up and down over time (eg for some types of guarantee).
(c) Contracts that implicitly provide protection against a decline in insurability.
(d) Annuities.
(e) Investment management services in participating insurance contracts.

Many life insurance contracts pose another difficulty for the revenue recognition
model. Consider a 20-year life insurance contract with monthly fixed level
premiums, with the insurer having no ability to reprice the contract during its term.
The premium paid for each month provides the policyholder with two benefits:

Page | 26
(a) Coverage against death during that month.
(b) Coverage against the possibility of a decline in insurability, or even against
becoming uninsurable, in the event of bad health.

A life-contingent annuity can be viewed as a series of pure endowments. A pure

endowment is a contract that pays a specified benefit if the policyholder is alive on
a specified date. Each of those pure endowments obliges the insurer to stand ready
to pay out the specified benefit if the policyholder survives to the specified date.
Thus, for annuities, the revenue recognition model would, in principle, require the
insurer to allocate the total transaction price across each pure endowment
contained in the contract. Assuming the annuity requires monthly payments, the
insurer would recognize each month as revenue the portion of the transaction price
allocated to the obligation maturing in that month. Furthermore, for policyholders
who die during the month, the insurer no longer has any performance obligations
to them and so would recognize the remaining transaction price as revenue during
that month. And if the policyholders are expected to live longer than previously
expected, the insurer would need to reallocate transaction price across performance
obligations accordingly. The resulting model is not likely to provide useful
information to users and it is likely to be complex to implement.

A further problem arises because the revenue recognition model applies different
approaches to contract rights and unsatisfied performance obligations, by
measuring:
(a) The contract rights on an expected present value basis.
(b) The unsatisfied performance obligations at the amount of consideration
allocated to those obligations, supplemented by an onerous contract test based on
future cash flows.

In general, the Board decided that it would not be appropriate to account for
insurance contracts using pervious accounting models because many such models:
(a) Do not use current estimates of all cash flows.
(b) Do not include an explicit risk margin.
(c) Fail to reflect the time value of some or all embedded options and guarantees,
or they determine time value in a way that is inconsistent with current market
prices.
(e) Present an insurer’s financial performance, particularly for life insurance, in a
manner that is difficult for users to understand.

Page | 27
The IFRS 4 proposes a new accounting model that reflects the Board’s view that
insurance contracts that blend financial elements with service elements in various
proportions, depending on the type of contract, and that those elements combine to
generate a package of cash inflows and cash outflows. The model comprises the
following elements:
(a) A direct measurement that incorporates the underlying cash flows at their
expected present value and includes a risk adjustment. The draft IFRS uses the
term ‘present value of fulfillment cash flows’ to refer to that measurement.
(b) More relevant information about the amount, timing and uncertainty of future
cash flows that will arise as the insurer fulfils its existing insurance contracts.
(c) A residual margin that reports profitability of the contract over the coverage
period. The residual margin is part of the consideration received or receivable from
the policyholder and is determined at inception. The accounting for the residual
margin is largely consistent with the treatment of customer consideration.

Embedded options and guarantees

Insurance contracts contain many embedded options and guarantees, for example:
(a) Guarantees of minimum investment returns, minimum interest rates or
minimum crediting rates, minimum annuity rates or guarantees of maximum
charges for mortality.
(b) Surrender options, conversion options or options to cease or suspend payment.
(c) Options for the policyholder to reduce or extend coverage, or buy additional
coverage.

Inconsistent treatment of embedded options and guarantees was a major flaw in

many traditional accounting models. The flaws included:
(a) Ignoring the time value of some or all embedded options and guarantees. The
time value of such an item is the value arising from the possibility that the option
or guarantee may be in the money at the time when it has an effect (eg when the
option is exercisable).
(b) Capturing the intrinsic value of some or all embedded options or guarantees on
a basis that reflects management’s expectations or hopes but is inconsistent with
current market prices. The intrinsic value of such an item reflects the extent to
which the option or guarantee is in the money at the measurement date, and reflects
the difference between the current level of the variable underlying the option or
guarantee and the level specified in the underlying option or guarantee.
(c) Ignoring the intrinsic value of some or all embedded options or guarantees.

Page | 28
The proposed IFRS 4 measurement model for insurance contracts ensures that
embedded derivatives are measured in substantially the same way, because it
achieves the following:
(a) Consistency of financial variables (e.g. discount rates and equity market prices)
with observable market prices
(b) Capturing both the intrinsic value of options and their time value, by using
expected values that capture the cash flows arising in each scenario.
(c) Inclusion of a risk adjustment. Market valuations of financial instruments
reflect the degree of risk associated with the instrument. Including a risk
adjustment is conceptually consistent with that fact.
(d) Recognizing in profit or loss changes in the carrying amount of the derivatives.

Presentation
Statement of financial position:
The IFRS proposes that the combination of rights and obligations arising from an
insurance contract is presented as a single insurance contract asset or liability in the
statement of financial position, consistently with the measurement of an insurance
contract asset or liability based on a package of cash inflows and outflows.

Statement of comprehensive income:

The Board proposes a presentation model for reporting income and expense arising
from insurance contracts that is consistent with the proposed measurement model
by reporting the changes in the building blocks that make up the measurement of
the insurance contract. Such a presentation would provide users with useful
information about important performance factors. Accordingly, the statement of
comprehensive income should provide information about:
(a) The change in the risk adjustment.
(b) The release of the residual margin.
(c) The difference between the actual cash flows for the current period and
previous estimates of those cash flows.
(d) Changes in estimates (reimbursements) during the period.
(e) Interest expense on insurance liabilities (ie the ‘unwinding’ of the discount),
presented or disclosed in a way that highlights the relationship between interest
expense, changes in discount rates and investment return on the assets that back
those liabilities.

Page | 29
References:

Principles of Insurance Law, Emeric Fischer, Peter N. Swisher, Jeffrey W. Stempel

www.iasb.org/NR/rdonlyres/DC6611CC-9789-43E8.../IFRS4.pdf

Page | 30
Static analysis results

Agree Strongly Most

First Agree Neutral Disagree Standard
strongly disagree Mean selected
Section % % % deviation
% % option
Applying
IFRS 4 in Agree
76.7 23.3 0 0 0 4.77 0.43
insurance strongly
contracts
Applying it
in the
Agree
financial 46.7 43.3 10 0 0 4.37 0.66
strongly
statement
s
Investors
interested
3.3 13.3 36.7 43.3 3.3 2.7 0.87 Disagree
in applying
IFRS 4
Foreigners
investors
Agree
interested 46.7 40 13.3 0 0 4.3 0.71
strongly
in applying
IFRS 4
Applying
IFRS 4 by
Insurance
0 23.3 66.7 10 0 3.13 0.57 Neutral
companies
in capital
market
Auditors
make sure
10 66.7 23.3 0 0 3.87 0.57 Agree
of applying
IFRS 4
IFRS 4
Agree
open new 70 26.7 3.3 0 0 4.67 0.54
strongly
markets

From the previous table we can summarize that following:

1- The Palestinian insurance companies apply IFRS 4 in making insurance contracts.

2- The Palestinian insurance companies apply IFRS 4 in their financial statements.
3- Local investors don’t pay attention on applying IFRS 4 in making the financial statements.
4- Foreigner investors pay attention on applying IFRS 4 in making the financial statements.
5- All the insurance companies participated in the capital market apply IFRS 4.
6- Auditors pay attention on applying IFRS 4 in making the financial statements.

Page | 31
 7- Applying IFRS 4 open new markets for the insurance companies

Agree Strongly Most

Second Agree Neutral Disagree Standard
strongly disagree Mean selected
Section % % % deviation
% % option
Allying with
Agree
foreigner 66.7 30 3.3 0 0 4.63 0.55
strongly
companies
IFRS 4
improve
presenting 13.3 86.7 0 0 0 4.13 0.34 Agree
accounting
information
IFRS 4 Help
comparing
the 23.3 60 13.3 3.3 0 4 0.71 Agree
financial
statements
There are
barriers
against 0 10 20 43.3 26.7 2.13 0.93 Disagree
applying
IFRS 4

From the previous table we can summarize that following:

1. Applying IFRS 4 helps the insurance company to ally with the foreigner companies.
2. Applying IFRS 4 Improve presenting the accounting information in the financial statements.
3. Applying IFRS 4 help the insurance companies to compare their financial statements with other
companies.
4. There are no barriers against applying IFRS 4 in Gaza.

Recommendations:

The insurance companies should apply IFRS 4 in formulating the insurance contracts and in their
financial statements to get the benefits of this standard.

Page | 32