International Financial Reporting Standards

Accounting for insurance

contractsIFRS 4
Joint World Bank and IFRS Foundation train
the trainers workshop hosted by the ECCB
30 April to 4 May 2012

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Introduction 2

IFRS 4 applies to insurance contracts issued by any

entity, including entities that are not regulated as
insurers
Includes both insurance and reinsurance contracts
issued
Also includes reinsurance contracts held
It does not address other aspects of accounting by
insurers, such as accounting for financial assets

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Definition
Insurance contract 3

Under an insurance contract, 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
Some contracts having the legal form of insurance may
not meet that definition
Insurance contracts transfer insurance risks (rather than
only financial risks)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Definition
Insurance contract continued 4

Significant insurance risk

significant additional benefits in any scenario (that has
commercial substance)
not a percentage test
contract by contract
Unbundling a deposit component
Embedded derivatives

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Continuing previous accounting 5

IFRS 4 permits insurers to retain most aspects of their

previous accounting for insurance contracts
This avoids disruption while the IASB works on a
comprehensive review of accounting for insurance
contracts
The nature and extent of judgements and estimates will,
therefore, depend largely on that previous accounting
Typically this will involve estimates of uncertain cash
flows

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Unbundling deposit component 6

NO
Can measure deposit
MUST NOT unbundle
component separately?

YES
YES
All rights and obligations MAY unbundle
recognised?

NO

MUST unbundle

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

 Embedded derivatives 7

IFRS 9 requires fair value measurement for many

embedded derivatives
IFRS 4 exempts embedded derivatives that:
are themselves an insurance contract (specific
disclosure required); or
are an option to surrender insurance contract for fixed
amount

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Recognition and measurement 8

IAS 8 Hierarchy
Criteria to use in developing accounting policy in
absence of specific IFRS guidance
Exempt under IFRS 4 for insurance contracts issued,
and reinsurance contracts held
But
may not change policy unless result is more relevant and
reliable
may continue existing practice, but not introduce them

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Recognition and measurement 9

Liability adequacy test

Use existing test if minimum requirements met:
consider current estimates of all contractual cash flows,
including embedded options and guarantees
recognise any loss immediately in profit or loss
Otherwise test using provisions standard (IAS 37)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Recognition and measurement 10

Continue, but may not introduce

Non-discounting of insurance liabilities
Off-market measurement of contractual rights to
investment management fees
Non-uniform accounting policies for insurance liabilities
of subsidiaries
Excessive prudence
Future investment spreads (rebuttable presumption)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

DPFs 11

DPF = Discretionary Participation Features

Contractual right to additional benefits:

likely to be significant portion of total benefits
amount or timing contractually at the discretion of the
issuer, and
contractually based on:
performance of specified contracts
returns on specified assets, or
profit or loss

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Insurance contracts with DPF 12

Guaranteed element
policyholder has unconditional right
must classify as liability
Discretionary participation feature
may classify as liability, equity or split
do not show as mezzanine

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Investment contracts with DPF 13

May classify whole contract as liability

if so, apply liability adequacy test
May classify part or all of DPF in equity
reported liability not less than IAS 39 measurement
of guaranteed element

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates 14

Determining whether contracts with the legal form of an

insurance contract are insurance contracts as defined in
IFRS 4

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Insurance models 15

Current current
Current current with discretionary reserving
Cost cost with OCI
Cost cost

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Accounting for insurance

contracts
IFRS 4 Phase II
Joint World Bank and IFRS Foundation train
the trainers workshop hosted by the ECCB,
30 April to 4 May 2012

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Project objective 17

Improve comparability in the accounting for insurance

contracts through:
coherent, principles-based framework for all types
of insurance contracts (no need for add-on rules)
transparent reporting of changes in insurance
contract liability
transparent reporting of economic value of
embedded options and guarantees

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Urgent need for change 18

IFRS 4
exempts insurers from developing relevant and
reliable accounting policies
wide range of accounting for different types of
contracts
inconsistent application across jurisdictions
exempts requirement for uniform accounting
policies across a group

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What are we trying to do? 19

Updated measurement
of insurance contract
liabilities that captures
all features of the
contract

Disclosures about Presentation that gives

inherent risk and information about
uncertainty drivers of performance

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

 Building block approach 20

Residual margin Contract profit (reported over the life of the contract)

An assessment of the difference between an uncertain

Risk adjustment
liability and a liability whose amount is certain

Time value of money An adjustment that reflects the time value of money
Total
insurance
liability

The amounts the insurer expects to collect from

Cash flows premiums and pay out for claims, benefits and
expenses, estimated using up-to-date information

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The model: Key features 21

New updated Reflects the

information is more difference between
relevant than old an uncertain liability
information and a liability whose
amount is certain
Updated
Current
estimates
measurement
and
of risk
assumptions

Market Reflect time

consistent value of
estimates money

Reflects best Investors are not

available information indifferent to time
value of money

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Which cash flows? 22

Residual margin
An explicit, unbiased and probability-
weighted estimate of the future cash
Risk adjustment outflows less the future cash inflows that
will arise as the insurer fulfils the insurance
Time value
of money contract
Confirmed use of expected value of cash
flows incurred, considering all relevant
information
Cash flows
+ Add guidance that not all possible
scenarios need to be identified and
quantified

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Which cash flows? continued 23

Premium Premium
Contract boundary:
received received Contract ends when:
Recognition Not required to
point: provide coverage
Contract Can reprice to
starts when reflect risks of
coverage policyholder
Expenses
period begins Claim
payment
When insurer can
Acquisition reprice to reflect
costs
risk of portfolio
Included in cash flows:
All direct costs of originating and all
directly attributable costs incurred in
fulfilling a portfolio of insurance
contracts
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Time value of money 24

Residual margin A discount rate that adjusts cash flows for the
time value of money
Risk adjustment

Confirm discount rate:

Time value
of money
reflect only characteristics of the
insurance contract liability
current and updated each reporting
period
Cash flows
+ Guidance on determining the discount rate
top-down and bottom-up
remove any factors not relevant to the
liability
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Residual margin 25

Residual margin A residual margin that eliminates any gain at

inception of the contract
Risk adjustment
Confirm no gain at inception
Time value
of money Adjust for changes in estimates of cash flows
Adjustments made prospectively

Cash flows

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

 Reinsurance assets 26

Calibrated to
Residual margin
Residual margin

Calibrated to
direct contract reinsurance
Risk adjustment
= Risk adjustment

Same inputs and assumptions

premium contract
premium
Time value of money
= Time value of money

Cash flows
= Cash flows

Reinsured part of Cedants reinsurance

cedants liability asset
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Reinsurance assets 27

Residual margin
ED: symmetry with underlying liability
losses at inception recognised over
Risk adjustment contract term
Time value
gains at inception recognised immediately
of money
Tentative decisions:
use same estimates for reinsurance asset
and underlying direct insurance liability
Cash flows gains recognised over contract term
losses recognised immediately if for past
events, otherwise deferred

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Short duration contracts 28

Liability for remaining coverage reduced

Residual margin
over coverage period
Risk adjustment Onerous contract test when facts and
circumstances indicate
Time value
of money
Claims liability discounted if material
Eligible for this approach if outcome
reasonably approximates BBA
Cash flows 12 month practical expedient
approach is permitted, not required

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Presentation: remaining questions 29

Provide information about premiums, claims and

expenses
Still to conclude:
level of disaggregation on the income statement
separately disclose short and long term contracts
treatment of deposits in premium income
presentation in other comprehensive income

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Next steps 30

Complete remaining topics

Assess whether any differences between IASB and
FASB can be reconciled
Review draft or re-expose (early 2012)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Questions or comments?

Expressions of individual
views by members of the
IASB and its staff are
encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB
on accounting matters are
determined only after
extensive due process
and deliberation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

 32

The requirements are set out in International Financial

Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org