TMI BlogInsurance ContractsX X X X Extracts X X X X X X X X Extracts X X X X ..... instruments that it issues with a discretionary participation feature (see paragraph 35). Ind AS 107, Financial Instruments: Disclosures, requires disclosure about financial instruments, including financial instruments that contain such features. 3 This Ind AS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see Ind AS 32, Financial Instruments: Presentation, Ind AS 107 and Ind AS 109, Financial Instruments). 4 An entity shall not apply this Ind AS to: 6 [(a) product warranties issued directly by a manufacturer, dealer or retailer (see Ind AS 115 , Revenue from Contracts with Customers and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets ).] (b) employers assets and liabilities under employee benefit plans (see Ind AS 19, Employee Benefits, and Ind AS 102, Share-based Payment) and retirement benefit obligations reported by defined benefit retirement plans. 13 [ (c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thermore, those requirements also apply if the holder s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level). 9 Paragraph 8 applies equally to options to surrender a financial instrument containing a discretionary participation feature. Unbundling of deposit components 10 Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components: (a) unbundling is required if both the following conditions are met: (i) the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component). (ii) the insurer s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component. (b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted insurance contracts. (e) shall consider whether its reinsurance assets are impaired (see paragraph 20). Liability adequacy test 15 An insurer shall assess at the end of each reporting period whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss. 16 If an insurer applies a liability adequacy test that meets specified minimum requirements, this Ind AS imposes no further requirements. The minimum requirements are the following: (a) The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees. (b) If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss. 17 If an insurer s account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady applies Ind ASs and to changes made by an insurer adopting Ind ASs for the first time. 22 An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in Ind AS 8. 23 To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in Ind AS 8, but the change need not achieve full compliance with those criteria. The following specific issues are discussed below: (a) current interest rates (paragraph 24); (b) continuation of existing practices (paragraph 25); (c) prudence (paragraph 26); (d) future investment margins (paragraphs 27 29); and (e) shadow accounting (paragraph 30). Current market interest rates 24 An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities 3 to reflect current market interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts, unless those margins affect the contractual payments. Two examples of accounting policies that reflect those margins are: (a) using a discount rate that reflects the estimated return on the insurer s assets; or (b) projecting the returns on those assets at an estimated rate of return, discounting those projected returns at a different rate and including the result in the measurement of the liability. 28 An insurer may overcome the rebuttable presumption described in paragraph 27 if, and only if, the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins. For example, suppose that an insurer s existing accounting policies for insurance contracts involve excessively prudent assumptions set at inception and a discount rate prescribed by a regulator without direct reference to market conditions, and ignore some embedded options and guarantees. The insurer might make its financial statements more relevant and no less reliable by switching to a comprehensive investor oriented basis of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contracts into two components: (a) a liability measured in accordance with the insurer s accounting policies for insurance contracts that it issues; and (b) an intangible asset, representing the difference between (i) the fair value of the contractual insurance rights acquired and insurance obligations assumed and (ii) the amount described in (a). The subsequent measurement of this asset shall be consistent with the measurement of the related insurance liability. 32 An insurer acquiring a portfolio of insurance contracts may use the expanded presentation described in paragraph 31. 33 The intangible assets described in paragraphs 31 and 32 are excluded from the scope of Ind AS 38 and Ind AS 36, Impairment of Assets. However, Ind AS 38 and Ind AS 36 apply to customer lists and customer relationships reflecting the expectation of future contracts that are not part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer. Discretionary participation features Discretionary participation features in insurance contracts 34 Some insurance contracts contain a discretionary p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply the liability adequacy test in paragraphs 15 19 to the whole contract (ie both the guaranteed element and the discretionary participation feature). The issuer need not determine the amount that would result from applying Ind AS 109 to the guaranteed element. (b) if the issuer classifies part or all of that feature as a separate component of equity, the liability recognised for the whole contract shall not be less than the amount that would result from applying Ind AS 109 to the guaranteed element. That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 9 exempts that option from measurement at fair value. The issuer need not disclose the amount that would result from applying Ind AS 109 to the guaranteed element, nor need it present that amount separately. Furthermore, the issuer need not determine that amount if the total liability recognised is clearly higher. (c) although these contracts are financial instruments, the issuer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in the carrying amount of the liability. (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce), including information about: (i) sensitivity to insurance risk (see paragraph 39A). (ii) concentrations of insurance risk, including a description of how management determines concentrations and a description of the shared characteristic that identifies each concentration (eg type of insured event, geographical area, or currency). (iii) actual claims compared with previous estimates (ie claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year. (d) information about credit risk, liquidity risk and market risk that paragraphs 31 42 of Ind AS 107 would require if the insurance contracts were within the scope of Ind AS 107. However: (i) an insurer need not provide the maturity analysis required by paragraph 39(a) and (b) of Ind AS 107 if it discloses information about the estimated timing of the net cash o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant insurance liabilities are those insurance liabilities (and related deferred acquisition costs and related intangible assets) for which the insurer s accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16. 3 In this paragraph, insurance liabilities include related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32. Appendix A Defined terms This appendix is an integral part of the Ind AS. Cedant The policyholder under a reinsurance contract. deposit component A contractual component that is not accounted for as a derivative under Ind AS 109 and would be within the scope of Ind AS 109 if it were a separate instrument. direct insurance contract An insurance contract that is not a reinsurance contract . discretionary participation feature A contractual right to receive, as a supplement to guaranteed benefits , additional benefits: (a) that are l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the policyholder if a specified uncertain future event (the insured event ) adversely affects the policyholder. (See Appendix B for guidance on this definition.) insurance liability An insurer s net contractual obligations under an insurance contract . insurance risk Risk, other than financial risk , transferred from the holder of a contract to the issuer. insured event An uncertain future event that is covered by an insurance contract and creates insurance risk . insurer The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs. liability adequacy test An assessment of whether the carrying amount of an insurance liability needs to be increased (or the carrying amount of related deferred acquisition costs or related intangible assets decreased), based on a review of future cash flows. policyholder A party that has a right to compensation under an insurance contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B5 Some insurance contracts require or permit payments to be made in kind. An example is when the insurer replaces a stolen article directly, instead of reimbursing the policyholder. Another example is when an insurer uses its own hospitals and medical staff to provide medical services covered by the contracts. B6 Some fixed-fee service contracts in which the level of service depends on an uncertain event meet the definition of an insurance contract in this Ind AS but are not regulated as insurance contracts in some countries. One example is a maintenance contract in which the service provider agrees to repair specified equipment after a malfunction. The fixed service fee is based on the expected number of malfunctions, but it is uncertain whether a particular machine will break down. The malfunction of the equipment adversely affects its owner and the contract compensates the owner (in kind, rather than cash). Another example is a contract for car breakdown services in which the provider agrees, for a fixed annual fee, to provide roadside assistance or tow the car to a nearby garage. The latter contract could meet the definition of an insurance contract even if the provider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anges in market prices for such assets (a financial variable) but also the condition of a specific non-financial asset held by a party to a contract (a non-financial variable). For example, if a guarantee of the residual value of a specific car exposes the guarantor to the risk of changes in the car s physical condition, that risk is insurance risk, not financial risk. B10 Some contracts expose the issuer to financial risk, in addition to significant insurance risk. For example, many life insurance contracts both guarantee a minimum rate of return to policyholders (creating financial risk) and promise death benefits that at some times significantly exceed the policyholder s account balance (creating insurance risk in the form of mortality risk). Such contracts are insurance contracts. B11 Under some contracts, an insured event triggers the payment of an amount linked to a price index. Such contracts are insurance contracts, provided the payment that is contingent on the insured event can be significant. For example, a life-contingent annuity linked to a cost-of-living index transfers insurance risk because payment is triggered by an uncertain event-the survival of the annuita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in pricing the contract) is not insurance risk because the payment to the counterparty is not contingent on an uncertain future event that adversely affects the counterparty. Similarly, expense risk (ie the risk of unexpected increases in the administrative costs associated with the servicing of a contract, rather than in costs associated with insured events) is not insurance risk because an unexpected increase in expenses does not adversely affect the counterparty. B16 Therefore, a contract that exposes the issuer to lapse risk, persistency risk or expense risk is not an insurance contract unless it also exposes the issuer to insurance risk. However, if the issuer of that contract mitigates that risk by using a second contract to transfer part of that risk to another party, the second contract exposes that other party to insurance risk. B17 An insurer can accept significant insurance risk from the policyholder only if the insurer is an entity separate from the policyholder. In the case of a mutual insurer, the mutual accepts risk from each policyholder and pools that risk. Although policyholders bear that pooled risk collectively in their capacity as owners, the mutual has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or retailer are outside its scope, because they are within the scope of Ind AS 115 and Ind AS 37.] (i) title insurance (ie insurance against the discovery of defects in title to land that were not apparent when the insurance contract was written). In this case, the insured event is the discovery of a defect in the title, not the defect itself. (j) travel assistance (ie compensation in cash or in kind to policyholders for losses suffered while they are travelling). Paragraphs B6 and B7 discuss some contracts of this kind. (k) catastrophe bonds that provide for reduced payments of principal, interest or both if a specified event adversely affects the issuer of the bond (unless the specified event does not create significant insurance risk, for example if the event is a change in an interest rate or foreign exchange rate). (l) insurance swaps and other contracts that require a payment based on changes in climatic, geological or other physical variables that are specific to a party to the contract. (m) reinsurance contracts. B19 The following are examples of items that are not insurance contracts: (a) investment contracts that have the legal form of an insurance co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a party to the contract. B20 If the contracts described in paragraph B19 create financial assets or financial liabilities, they are within the scope of Ind AS 109. Among other things, this means that the parties to the contract use what is sometimes called deposit accounting, which involves the following: (a) one party recognises the consideration received as a financial liability, rather than as revenue. (b) the other party recognises the consideration paid as a financial asset, rather than as an expense 11 [B21 If the contracts described in paragraph B19 do not create financial assets or financial liabilities, Ind AS 115 applies. Under Ind AS 115, revenue is recognised when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled.] Significant insurance risk B22 A contract is an insurance contract only if it transfers significant insurance risk. Paragraphs B8 B21 discuss insurance risk. The following paragraphs discuss the assessment of whether insurance risk is significant. B23 Insurance risk is significant if, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not accept significant insurance risk from the holder, this contract is not an insurance contract. (d) possible reinsurance recoveries. The insurer accounts for these separately. B25 An insurer shall assess the significance of insurance risk contract by contract, rather than by reference to materiality to the financial statements. 4 Thus, insurance risk may be significant even if there is a minimal probability of material losses for a whole book of contracts. This contract-by-contract assessment makes it easier to classify a contract as an insurance contract. However, if a relatively homogeneous book of small contracts is known to consist of contracts that all transfer insurance risk, an insurer need not examine each contract within that book to identify a few non-derivative contracts that transfer insignificant insurance risk. B26 It follows from paragraphs B23 B25 that if a contract pays a death benefit exceeding the amount payable on survival, the contract is an insurance contract unless the additional death benefit is insignificant (judged by reference to the contract rather than to an entire book of contracts). As noted in paragraph B24(b), the waiver on death of can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into simultaneously with a single counterparty (or contracts that are otherwise interdependent) form a single contract. Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the differences between Indian Accounting Standard (Ind AS) 104 and the corresponding International Financial Reporting Standard (IFRS) 4, Insurance Contracts, issued by the International Accounting Standards Board. Comparison with IFRS 4, Insurance Contracts 1 Different terminology is used, to make it consistent with existing laws eg, term balance sheet is used instead of Statement of financial position and Statement of profit and loss is used instead of Statement of comprehensive income . 2 The transitional provisions given in IFRS 4 have not been given in Ind AS 104, since all transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards. 22 [ 3. IFRS 4 contains provisions that address concerns arising from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15, Revenue from Contracts with Customers, and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets). 2. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (c) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some licence fees, royalties, contingent lease payments and similar items), as well as a lessee s residual value guarantee embedded in a finance lease (see Ind AS 17, Leases, Ind AS 115, Revenue from Contracts with Customers, and Ind AS 38, Intangible Assets). 3. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (b) If Ind AS 115 applied, the service provider would recognise revenue when (or as) it transfers services to the customer ( subject to other specified criteria). That approach is also acceptable under this Ind AS, which permits the service provider (i) to continue its existing accounting policies for these contracts unless they involve practices prohibited by paragraph 14 and (ii) to improve its accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at approach is also acceptable under this Ind AS, which permits the service provider (i) to continue its existing accounting policies for these contracts unless they involve practices prohibited by paragraph 14 and (ii) to improve its accounting policies if so permitted by paragraphs 22 30.] 10. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 4 [(h) product warranties. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of this Ind AS. However, product warranties issued directly by a manufacturer, dealer or retailer are outside its scope, because they are within the scope of Ind AS 18 and Ind AS 37.] 11. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 5 [ B21 If the contracts described in paragraph B19 do not create financial assets or financial liabilities, Ind AS 18 applies. Under Ind AS 18, revenue associated with a transaction involving the rendering of services is reco ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
