Chapter Four

Insurance Contracts
 What
What is
is Insurance
Insurance Contracts?
Contracts?
o An insurance contract is a contract under which one party (the
issuer) 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”.
o In insurance, the insurance policy is a contract( generally a
standard form contract) between the insurer and the policyholder,
which determines the claims which the insurer is legally required
to pay in exchange for an initial payment, known as the
premium, the insurer promises to pay for loss caused by peril
covered under the policy
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 Cont.
Cont.

o The insurance policy is generally integrated contract, meaning that

it includes all forms associated with the agreement between the
insured and insurer.
o In some cases, however, supplementary writings such as letters
sent after the final agreement can make the insurance policy a non-
integrated contract.
o With both parties consent, are part of the written policy

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 Cont.
Cont.
o Courts consider all prior negotiations or agreements meaning
every contractual term in the policy at the time of delivery, as well
as those written afterward as policy riders and endorsements.
o Reinsurance contract is an insurance contract issued by one entity
(the reinsurer) to compensate another entity (the ”cedant”) for
claims arising from one or more insurance contracts issued by the
cedent”

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 Recognition
Recognition and
and DE
DE recognition
recognition
 When to recognize and derecognize insurance contracts?

 Under IFRS 17 insurance contracts are to be initially recognized

at the earliest of
 the beginning of coverage period or when the first payment
becomes due; or
 the date when facts/circumstances indicate the contract is
onerous

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 Recognition
Recognition and
and DE
DE recognition
recognition
 When to recognize and derecognize insurance contracts?
 Insurance contracts are to be derecognized when

➢ the insurance contract is extinguished - when the obligation is discharged

or cancelled or expired.
➢ OR when specified modifications of the terms of the contract are met, e.g.
the modified contract does no longer meet the criteria for simplified
accounting

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 Measurement
Measurement

o IFRS 17 Insurance Contracts establishes specific principles for grouping

contracts together (LoA).
o This grouping is particularly relevant for the determination of the contractual
service margin (CSM) and the limitation of offsetting effects for subsequent
measurement.
o An entity shall identify portfolios of insurance contracts.
o A portfolio comprises contracts subject to similar risks and managed together.

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 Measurement
Measurement

o An entity shall divide a portfolio of insurance contracts issued

into a minimum of
1. a group of contracts that are onerous at initial recognition, if
any;
2. a group of contracts that at initial recognition have no
significant possibility of becoming onerous subsequently, if
any;
3. a group of the remaining contracts in the portfolio, if any.
 Expected gains and losses are treated differently under IFRS 17

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 Measurement
Measurement

o Contracts that at inception have no significant possibility of becoming

onerous subsequently, if any and Other profitable contracts, if any
Thus, Unearned profit is recognised as liability and is released as insurance
services are provided
o Contracts that are onerous at inception, if any

Thus, a loss is recognised in P/L

o Three different ways to measure insurance contracts under IFRS 17:

1. general measurement model (GMM / BBA);

2. premium allocation approach (PAA); and
3. variable fee approach (VFA).

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 Measurement
Measurement

1. General Measurement Model

o Default model to measure insurance contract liabilities under IFRS 17

o Also known as building blocks approach (BBA)

o Losses recognized in P&L at inception and gains capitalized

o Total carrying amount = liability for the remaining coverage (LRC) + liability for
incurred claims (LIC)

o Liability for remaining coverage (LRC) is relating to coverage that will be

provided to the policyholder for insured events that have not yet occurred
o Liability for incurred claims (LIC) is relating to claims and expenses for
insured events that have already occurred.

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 Cont.
Cont.
2. Premium Allocation Approach
Option to apply PAA, if and only if
 Coverage period one year or less
 Or measurement differs not materially from BBA
 May be applied to liability for the remaining coverage (LRC)
only
 BBA to be applied to liability for incurred claims (LIC)

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 Cont
Cont
3. Variable Fee Approach
 Modification of BBA
 for contracts with direct participation features
 Not admitted for reinsurance held
 Only valid for some insurance contracts

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 Subsequent
Subsequent Measurement
Measurement
o In each reporting period, an entity re-measures the
fulfilment cash flows using updated assumptions about
cash flows, discount rate and risk.

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End of Chapter Four