Insurance Risk

IFRS 4 replaces what had been an indirect definition of an insurance contract under IAS 32 with a positive definition based on the transfer of significant insurance risk from the policyholder to the insurer. This definition covers most motor, travel, life, annuity, medical, property, reinsurance and professional indemnity contracts. Some catastrophe bonds and weather derivatives would also qualify, as long as payments are linked to a specific climatic or other insured future event that would adversely affect the policyholder. On the other hand, policies that transfer no significant insurance risk—such as some savings and pensions plans—will be deemed financial instruments, addressed by IFRS 9, regardless of their legal form. IFRS 9 also applies to contracts that principally transfer financial risk, such as credit derivatives and some forms of financial reinsurance.

There may be some difficulty in classifying the more complex products (including certain hybrids). To facilitate this process, the IASB has explained that insurance risk will be deemed significant only if an insured event could cause an insurer to pay significant additional benefits in any scenario, apart from a scenario that lacks commercial substance. As a practical matter, reporting entities should compare the cash flows from: (1) the occurrence of the insured event against (2) all other events. If the cash flows under the former are significantly larger than under the latter, significant insurance risk is present.

For example, when the insurance benefits payable upon death are significantly larger than the benefits payable upon surrender or maturity, there is significant insurance risk. The significance of the additional benefits is to be measured irrespective of the probability of the insured event, if the scenario has commercial substance. Reporting entities have to develop internal quantitative guidance to ensure the definition is applied consistently throughout the entity. To qualify as significant, the insurance risk also needs to reflect a pre-existing risk for the policyholder, rather than having arisen from the terms of the contract.

This requirement would specifically exclude from the cash flow comparison features such as waivers of early redemption penalties within investment plans or mortgages in the event of death. Since it is the contract itself that brought the charges into place, the waiver does not represent an additional benefit received for the transfer of a pre-existing insurance risk.

The application of this IFRS 4 definition may result in the redesignation of a significant fraction of existing insurance contracts as investment contracts. In other situations, the impact could be the opposite. For example, a requirement to pay benefits earlier if an insured event occurs could make a contract insurance; this means that many pure endowment contracts are likely to meet the definition of insurance. All told, insuring entities will need to set clear, consistent and justifiable contract classification criteria and rigorously apply these.

Adequacy of Insurance Liabilities

IFRS 4 imposes a liability adequacy test, which requires that at each reporting date the “insurer” must assess whether its recognised insurance liabilities are adequate, using then-current estimates of future cash flows under the outstanding insurance contracts. If as a result of that assessment it is determined that the carrying amount of insurance liabilities (less related deferred acquisition costs and related intangible assets, if appropriate—see discussion below) is insufficient given the estimated future cash flows, the full amount of such deficiency must be reported currently in earnings.

The standard defines minimum requirements for the adequacy test that is to be applied to the liability account. These minimum requirements are that:

1. The test considers the current estimates of all contractual cash flows, and of such related cash flows as claims handling costs, as well as cash flows that will result from embedded options and guarantees.
2. If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss.

In situations where the insuring entity's accounting policies do not require a liability adequacy test, or provide for a test that does not meet the minimum requirements noted above, then the entity is required under IFRS 4 to:

1. Determine the carrying amount of the relevant insurance liabilities, less the carrying amount of:
   1. Any related deferred acquisition costs; and
   2. Any related intangible assets, such as those acquired in a business combination or portfolio transfer. However, related reinsurance assets are not considered because an insurer accounts for them separately.
2. Determine whether the carrying amount of the relevant net insurance liabilities is less than the carrying amount that would be required if the relevant insurance liabilities were within the scope of IAS 37. If it is less, the insurer shall recognise the entire difference in profit or loss and decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities.

The IAS 37-based amount is the required minimum liability to be presented. Therefore, if the current carrying amount is less, the insuring entity must recognise the entire shortfall in current period earnings. The corresponding credit to this loss recognition will either decrease the carrying amount of the related deferred acquisition costs or related intangible assets or increase the carrying amount of the relevant insurance liabilities, or both, dependent upon the facts and circumstances.

In applying the foregoing procedures, any related reinsurance assets are not considered, because an insuring entity accounts for these separately, as noted later in this discussion.

If an insuring entity's liability adequacy test meets the minimum requirements set forth above, this test is applied at the level of aggregation specified above. On the other hand, if the liability adequacy test does not meet the stipulated minimum requirements, the comparison must instead be made at the level of a portfolio of contracts that are subject to broadly similar risks and which are managed together as a single portfolio.

For purposes of comparing the recorded liability to the amount required under IAS 37, it is acceptable to reflect future investment margins only if the carrying amount of the liability also reflects those same margins. Future investment margins are defined under IFRS 4 as being employed if the discount rate used reflects the estimated return on the insuring entity's assets, or if the returns on those assets are projected at an estimated rate of return, and discounted at a different rate, with the result included in the measurement of the liability. There is a rebuttable presumption that future investment margins should not be used; however, exceptions (see below) can exist.

Selection of Accounting Principles

IFRS requires certain accounting practices to be adopted with regard to insurance contracts, but also allows other, existing procedures to remain in place under defined conditions. An insuring entity may, under the provisions of IFRS 4, change accounting policies for insurance contracts only if such 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. Relevance and reliability are to be assessed by applying the criteria set forth in IAS 8.

To justify changing its accounting policies for insurance contracts, an insuring entity must demonstrate that the change brings its financial statements nearer to satisfying the criteria of IAS 8, but the change does not necessarily have to achieve full compliance with those criteria. The standard addresses changes in accounting policies in the context of current interest rates; continuation of existing reporting practices; prudence; future investment margins; and “shadow accounting.” These are discussed in the following paragraphs.

Regarding interest rates, IFRS 4 provides that an insuring entity is permitted, although it is not required, to change its accounting policies such that it remeasures designated insurance liabilities to reflect current market interest rates, and recognises changes in those liabilities in current period earnings. It may also adopt accounting policies that require other current estimates and assumptions for the designated liabilities. IFRS 4 permits an insuring entity to change its accounting policies for designated liabilities, without consistently applying those policies to all similar liabilities, as the requirements under IAS 8 would suggest. If the insuring entity designates liabilities for this policy choice, it must continue to apply current market interest rates consistently in all periods to all these liabilities until they are later eliminated.

An unusual feature of IFRS 4 is that it offers affected reporting entities the option to continue with their existing accounting policies. Specifically, an insuring entity is allowed to continue the following practices if in place prior to the effective date of IFRS 4:

1. Measuring insurance liabilities on an undiscounted basis.
2. 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. It is likely that the fair value at inception of those contractual rights equals the origination costs paid, unless future investment management fees and related costs are out of line with market comparables.
3. Employing non-uniform accounting policies for the insurance contracts (and related deferred acquisition costs and intangible assets, if any) of subsidiaries, except as permitted by the above-noted interest provision. If those accounting policies are not uniform, the insuring entity may change them if the change does not make the accounting policies more diverse, and also satisfies the other requirements of the standard.

The concept of prudence, as set forth in IFRS 4, is meant to excuse an insuring entity from a need to change its accounting policies for insurance contracts to eliminate excessive prudence (i.e., conservatism). However, if the insuring entity already measures its insurance contracts with sufficient prudence, it is not permitted to introduce additional prudence following adoption of IFRS 4.

The matter of future investment margins requires some explanation. Under IFRS 4 it is clearly preferred that the measurement of insurance contracts should not reflect future investment margins, but the standard does not require reporting entities to change accounting policies for insurance contracts to eliminate future investment margins. On the other hand, adopting a policy that would reflect this is presumed to be improper (the standard states that there is a rebuttable presumption that the financial statements would become less relevant and reliable if an accounting policy that reflects future investment margins in the measurement of insurance contracts is adopted, unless those margins affect the contractual payments). The standard offers two examples of accounting policies that reflect those margins. The first is using a discount rate that reflects the estimated return on the insurer's assets, while the second is 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.

IFRS 4 states that the insuring entity could possibly overcome this rebuttable presumption 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. As an example, it cites the situation where the existing accounting policies for insurance contracts involve excessively prudent (i.e., conservative) assumptions set at inception, and a statutory discount rate not directly referenced to market conditions and ignore some embedded options and guarantees. This entity might make its financial statements more relevant and no less reliable by switching to a comprehensive investor-oriented basis of accounting that is widely used and involves current estimates and assumptions; a reasonable (but not excessively prudent) adjustment to reflect risk and uncertainty; measurements that reflect both the intrinsic value and time value of embedded options and guarantees; and a current market discount rate, even if that discount rate reflects the estimated return on the insuring entity's assets.

The actual ability to overcome IFRS 4's rebuttable presumption is fact dependent. Thus, in some measurement approaches, the discount rate is used to determine the present value of a future profit margin, which is then attributed to different periods using a formula. In such approaches, the discount rate affects the measurement of the liability only indirectly, and the use of a less appropriate discount rate has limited or no effect on the measurement of the liability at inception. In yet other approaches, the discount rate determines the measurement of the liability directly, and because the introduction of an asset-based discount rate has a more significant effect, it is highly unlikely that an insurer could overcome the rebuttable presumption noted above.

Finally, there is the matter of shadow accounting. According to IFRS 4, an insurer is permitted, but not required, to change its accounting policies so that a recognised but unrealised gain or loss on an asset affects those measurements in the same way that a realised gain or loss does. This is because, under some accounting models, realised gains or losses on an insurer's assets have a direct effect on the measurement of some or all of: (1) its insurance liabilities; (2) related deferred acquisition costs; and (3) related intangible assets. IFRS 4 provides that the related adjustment to the insurance liability (or deferred acquisition costs or intangible assets) may be recognised in equity if, and only if, the unrealised gains or losses are recognised directly in equity.

Unbundling

Specific requirements pertain to unbundling of elements of insurance contracts, and dealing with embedded derivatives, options and guarantees.

Unbundling refers to the accounting for components of a contract as if they were separate contracts. Some insurance contracts consist of an insurance component and a deposit component. IFRS 4 in some cases requires the reporting entity to unbundle those components, and in other fact situations provides the entity with the option of unbundled accounting. Specifically, unbundling is required if both the following conditions are met:

1. The insuring entity can measure the deposit component (inclusive of any embedded surrender options) separately (i.e., without considering the insurance component); and
2. The insuring entity's accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.

On the other hand, unbundling is permitted, but not required, if the insuring entity can measure the deposit component separately but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.

Unbundling is actually prohibited if an insuring entity cannot measure the deposit component separately. If unbundling is applied to a contract, the insuring entity applies IFRS 4 to the insurance component of the contract, while using IFRS 9 to account for the deposit component of that contract.

Recognition

IFRS 4 prohibits the recognition of a liability for any provisions for possible future claims, if those claims arise under insurance contracts that are not in existence at the reporting date. Catastrophe and equalisation provisions are thus prohibited, because they do not reflect loss events that have already occurred and therefore recognition would be inconsistent with IAS 37. Loss recognition testing is required for losses already incurred at each date of the statement of financial position, as described above. An insurance liability (or a part of an insurance liability) is to be removed from the statement of financial position only when it is extinguished (i.e., when the obligation specified in the contract is discharged or cancelled or expires).

In terms of display, offsetting of reinsurance assets against the related insurance liabilities is prohibited, as is offsetting of income or expense from reinsurance contracts against the expense or income from the related insurance contracts.

Discretionary Participation Features in Insurance Contracts

Insurance contracts sometimes contain a discretionary participation feature, as well as a guaranteed element. (That is, some portion of the return to be accrued to policyholders is at the discretion of the insuring entity.) Under the provisions of IFRS 4, the issuer of such a contract may, but is not required to, recognise the guaranteed element separately from the discretionary participation feature. If the issuer does not recognise them separately, it must classify the entire contract as a liability. If, on the other hand, the issuer classifies them separately, it will classify the guaranteed element as a liability. If the entity recognises the discretionary participation feature separately from the guaranteed element, the discretionary participation feature can be classified either as a liability or as a separate component of equity; the standard does not specify how the decision should be reached. In fact, the issuer may even split that feature into liability and equity components, if a consistent accounting policy is used to determine that split.

When there is a discretionary participation feature which is reported in equity, the reporting entity is permitted to recognise all premiums received as revenue, without separating any portion that relates to the equity component. Changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability are to be reported in earnings, while changes in the part of the discretionary participation feature classified as equity are to be accounted for as an allocation of earnings, similar to how minority interest is reported.

Embedded Derivatives

If the contract contains an embedded derivative within the scope of IFRS 9, that standard must be applied to that embedded derivative.

Applying IFRS 9 with IFRS 4

IFRS 4 was amended September 2016 to create a temporary exception for insurers to remain applying IAS 39 rather than IFRS 9 for annual periods beginning before January 1, 2021, if the insurer's activities are predominantly connected with insurance. If the entities activities are not predominantly connected with insurance, an overlay approach may be applied, under which the difference between the IFRS 9 and IAS 39 treatment is recognised in other comprehensive income.

The temporary exemptions from IFRS 9 and the overlay approach are also available to an issuer of a financial instrument that contains a discretionary participation feature.

Transitional Provisions

Scope

IFRS 17 is applicable to:

1. Insurance contracts and reinsurance contracts issued.
2. Reinsurance contacts held.
3. If the entity issues insurance contracts, investment contracts with discretionary participation features issued.

IFRS 17 is not applicable to:

1. Warranties provided by a manufacturer, dealer or retailer with the sale of goods and services.
2. Employers' assets and liabilities from employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans.
3. Contractual rights and obligations contingent on the future use or right of use of a non-financial item.
4. Residual value guarantees provides by a manufacturer, dealer or retailer and a lessee's residual value guarantees embedded in a lease.
5. Financial guarantee contracts. However, if the issuer previously regarded such contracts as insurance contract and has used insurance accounting, the issuer may continue to identify such contracts as insurance contracts. The issuer might choose to apply IFRS 17 or IAS 32 and IFRS 7 disclosure to such contacts. The choice could be made on a contact-by-contact basis but is then irrevocable.
6. Contingent consideration payable or receivable in a business combination.
7. Insurance contracts, except for reinsurance contacts, in which the entity is the policyholder.
8. Credit card contracts, or similar contracts that provide credit or payment arrangements. This exception is only applicable if the entity does not make an assessment of the related insurance risk in setting the price of the contract. However, if the embedded insurance component is separated in terms of IFRS 9, IFRS 17 is applied to that component.

Some fixed fee service contracts might be identified as insurance contracts. An entity may choose to apply IFRS 15 and not IFRS 17 if the following conditions are met:

1. The risk of a customer is not assessed in setting the price.
2. The contract compensates the customer by providing a service.
3. The insurance risk arises primary from the customer's use of a service and not the uncertainty over the cost of the service.

This choice is made on a contact-by-contact basis and is irrevocable.

In certain insurance contacts, the compensation for insurance events might be limited to the amount of obligation required to settle the contacts. The entity could choose to apply IFRS 17 or IFRS 9. This choice is made for each portfolio of insurance contracts and is irrevocable.

Identification and Unbundling

IFRS 17 in principle transfers all the requirements to identify an insurance contract from IFRS 4. New rules are created for the unbundling of deposits and non-insurance revenue components. The following process is followed for unbundling:

1. Identify and account for embedded derivatives by applying IFRS 9.
2. Separate from a host insurance contract an investment component when that investment component is distinct and then apply IFRS 9 to the investment component.
3. Separate from the host insurance contract any promise to transfer distinct non-insurance goods or services to a policyholder by applying IFRS 15.

Investment components are distinct if the components are not highly interrelated and a contract with equivalent terms is, or could be, sold in the market or jurisdiction. Components are highly interrelated if the one component could not be measured without the other, or the policyholder is not able to benefit from the one component unless the other is also present.

The Fulfilment Value Approach

The benchmark approach in IFRS 17 is based on the principle that insurance contracts create a bundle of rights and obligations that work together to generate a package of cash inflows (premiums) and outflows (benefits and claims). An insurer would apply to that package of cash flows a measurement approach, called the fulfilment value approach, that uses the following building blocks:

1. A current estimate of the expected future net cash flows from premiums, claims, benefits and expenses.
2. An explicit risk adjustment for uncertainty about the amount of future cash flows.
3. A discount rate that adjusts those cash flows for the time value of money.
4. A contract service margin.

Components of the building block approach are defined in IFRS 17 as follows:

The first three building blocks are regarded to be the fulfilment cash flows and the contract service margin reflects the entity's risk-adjusted expected profit from the contract. The contract service margin eliminates the recognition of any gain at inception of the contract. The contractual service margin is therefore the unearned profits on the contract and is reduced as the profits are earned over the duration of the contract. The contract service margin is updated for changes in future service-related estimations. The effect of the fulfilment value approach is that the profit from a group of insurance contracts is spread over the period the entity provides insurance coverage, and therefore is released from insurance risks.

However, if a group of contracts is loss-making (onerous), the loss is recognised immediately. A group of insurance contracts become onerous when the contact service margin is eliminated because of unfavourable changes in fulfilment cash flows.

Cash flows within the boundary of insurance contracts should be included in the fulfilment value when:

1. The cash flows arise from substantive rights and obligation;
2. The policyholder is compelled to pay premiums; and
3. The entity has a substantive obligation to provide the insurance service.

Cash flows within the boundary of insurance contracts are those that are directly related and include:

1. Premiums.
2. Claims.
3. Variable returns based on assets.
4. Acquisition cost.
5. Options and guarantees.
6. Claim handling cost.
7. Policy administrative and maintenance cost.
8. An allocation of fixed and variable overheads.

The following cost flows are, however, specifically excluded from the boundary of insurance contracts.

1. Cost of related investment services.
2. Investment returns.
3. Cash flows under reinsurance held.
4. Future insurance contracts.
5. Cash flows not directly attributable, such as product development and training cost.
6. Abnormal amounts.
7. Income tax payments (not in fiduciary capacity).
8. Cash flows for other activities or transfer of funds.

The estimation of the future cash flows is adjusted to reflect the time value of money and the financial risks associated with the cash flows not adjusted in the cash flows.

The risk adjustment for non-financial risk reflects the compensation an entity bears for the uncertainty in the amount and timing of the cash flows arising from non-financial risk.

Insurance acquisition cash flows that are directly attributable to a group of insurance contracts are allocated on a systematic or rational basis to the group of insurance contracts and therefore included in the fulfilment value if not paid. An asset is created for such acquisition cash flows incurred before the group of insurance contracts is recognised. The asset is transferred when the group is recognised and since the cost are incurred will reduce the contact service margin that is recognised over the insurance service period.

Such recognised acquisition cost asset is assessed for recoverability at the end of each reporting period and any impairment or reversal is recognised in profit or loss.

The Premium Allocation Approach

A simplified premium allocation approach allows an entity to measure the amount relating to remaining service by recognising the unearned premiums received as a liability. The premium allocation approach is applicable when one of the following two options is applicable for entities that:

1. Expect that the liability for future coverage would not sufficiently differ from the fulfilment value approach; or
2. The coverage period for each contract in the group is one year or less.

Option one may not be applied when significant variance in fulfilment cash flows is expected. The coverage period of one year and less is, however, problematic since in unclear instances the assessment is based on when the boundary of an insurance contract end. The boundary of insurance contracts ends when the substantive rights in the contracts are completed:

1. For individual policyholders: when a practical ability to reassess risks of the contract and reset benefits (prices) exists;
2. For portfolio of contracts: a practical ability exists to (1) reassess the risks of the contracts and reset benefits (prices), and (2) when pricing of the contracts is only determined to the next reset date.

Under the premium allocation approach acquisition cost might be expenses, if the coverage period for each contract in the group is not more than a year for each contact in the group. If not expensed, the unamortised acquisition cash flows reduce the liability for remaining coverage.

Combination of Insurance Contracts

Insurance contracts with the same or related counterparty achieving an overall commercial effect might be combined to report the substance of such contracts.

Identifying Groups and Portfolios

Insurance contracts are classified in different portfolios to apply the applicable measurement basis based on three steps:

1. Whether groups of contracts have similar risks and are managed together.
2. Each portfolio of contracts must then be further divided at initial recognition into:
   1. onerous contracts (loss-making contracts);
   2. contracts that have no significant possibility of becoming onerous (profitable contracts);
   3. remaining contracts in the portfolio (less profitable contracts).
3. Each portfolio of contracts is further limited to a yearly grouping (yearly cohort).

Recognition of Insurance Contracts

IFRS 17 determines that a group of insurance contracts is recognised at the earlier of:

1. The beginning of the coverage period;
2. The date when the first payment from a policyholder becomes due; or
3. When a group of contracts becomes onerous.

Liability for Remaining Coverage and Liability for Incurred Claims

Under both the fulfilment value approach and the premium allocation approach a liability for remaining coverage and a liability for incurred claims must be recognised. These terms are defined as follows:

Under the fulfilment value approach, the liability for remaining coverage is the fulfilment value determined for a group of contracts plus the contact service margin, while for the premium allocation approach it is the revenue received in advance (unearned premiums) minus non-expensed acquisition cost (if not expensed), which are amortised over the service period. Under the fulfilment value approach, acquisition cost is deducted from the contract service margin and therefore spread as the net profit is recognised.

Under the fulfilment value approach, income and expenses are recognised as follows:

1. Insurance revenue for the reduction in the liability for remaining coverage because of services rendered during the year. Insurance revenue is thus a calculated amount based on movements in the liability for remaining coverage.
2. Insurance service expenses are recognised for actual expenses incurred that reduce the liability for remaining coverage. Adjustment for future services and estimates are adjusted in the contract service margin. Insurance service expenses are also recognised for onerous contact losses and reversals.
3. Insurance finance income and expenses for the effect of both time value of money and financial risk.

Under the premium allocation approach insurance revenue is recognised for premiums earned.

The liability for incurred claims for both the fulfilment value approach and the premium allocation approach is the future expected cash flows for claims incurred plus a risk adjustment for non-financial risks. The liability for incurred claims includes both claims reported but which are not paid or settled and claims incurred but not reported (IBNR). The liability for incurred claims is discounted if it is payable after 12 months.

Income and expenses are recognised for the following changes in the liability for incurred claims for both the fulfilment value and the premium allocation approaches:

1. Insurance service expenses for the increase in the liability for claims and expenses incurred during the year, excluding any investment components.
2. Insurance service expenses is also recognised for subsequent changes in the fulfilment cash flows for claims and incurred expenses.
3. Insurance finance income and expenses for the effect of both time value of money and financial risk.

Reinsurance Contracts

Reinsurance contracts issued by the insurance entity are treated similarly to other direct insurance business and included in the liability for remaining coverage and the liability for incurred claims.

Reinsurance contracts held by the insurance entity are treated similarly to insurance contracts but oppositely, thus either the fulfilment value or the premium allocation approach is correspondently used. Reinsurance contracts cannot be onerous.

A group of reinsurance contracts held are recognised at the earlier of the following:

1. The beginning of the coverage. However, the recognition of a group of reinsurance contracts that provide proportionate coverage are delayed until the related insurance contracts are recognised.
2. The date when the related group of onerous insurance contracts are recognised.

If the fulfilment value approach is followed, no unearned profit is created but a net cost or gain on purchasing a reinsurance contract, which represents the contact service margin. The net cost is, however, expensed on initial recognition if it relates to events occurring before the recognition date. Net gains are created for reinsurance contracts for which the related onerous insurance contracts are recognised to offset the onerous contract loss on the related insurance contract. A loss-recovery component of a reinsurance asset is created for related onerous insurance contracts that will be recovered in the future.

The risk adjustment for non-financial risk is determined as the risk transferred by the holder to the issuer of the related contracts. Reinsurance contracts should also be assessed for the risk of non-performance. Changes in the fulfilment cash flows due to non-performance do not relate to future services and therefore should not adjust the contract service margin.

The simplified premium allocation approach could be applied for reinsurance contracts if one of the following conditions applies:

1. The entity reasonably expects that the measurement will not materially differ from the fulfilment value approach; or.
2. The coverage period of all reinsurance contracts held in the group is one year or less.

In applying the premium allocation approach to reinsurance contracts held, the features that differ from insurance contracts issued are considered. Expenses rather than revenue is therefore created. If the related insurance contract is onerous, the carry amount of the asset for remaining coverage is adjusted and not the contract service margin.

Contracts with Participation Features

IFRS 17 also deals with contracts with participation features. For insurance contracts with direct participation features the entity's share of the changes in the fair value of the underlying items is included in the estimation of the future cash flows and therefore effect the contract service margin. For investment contracts with discretionary participation features, the requirements for insurance contracts are modified as follows:

1. The date of initial recognition is the date the entity becomes a party to the contract (similar to IFRS 9).
2. Cash flows are regarded to be within the contract boundary when they result from a substantive obligation of the entity to deliver cash at a present or future date. No substantive obligation to deliver cash is regarded to exist when the entity has the practical ability to set a price for the promise to deliver the cash that fully reflects the amount of cash promised and related risks.
3. The contractual service margin is recognised over the duration of the group of contracts in a systematic way that reflects the transfer of investment services under the contract.

Modification and Derecognition

When the terms of an insurance contract are modified, the old contract is derecognised and a new contract is recognised if strict conditions are met that changes the classification, unbundling of components, the contract boundary, the grouping or the approach applicable to the contract. If none of the modification conditions are met, the related changes in cash flows are included in the normal estimation of cash flows.

An insurance contract is derecognised when the contract is extinguished or any of the modification conditions applies.

Presentation

The presentation of an insurance entity's performance is divided into insurance service results and financial results to separate them. The financial results are further divided into finance (investment) results and finance expense. The presentation in the income statement will then be as follows:

The new format of the income statement is applicable to both entities that previously were regarded as short-term or long-term insurers. The IASB wants to create comparability between insurance and other entities. Revenue is regarded as the amount charged for insurance coverage as it is earned. Revenue should therefore specially be calculated when the fulfilment value approach is followed. Under the premium allocation approach revenue represents the earned premiums. Insurance finance expenses resulting from changes in interest rates may be transferred to other comprehensive income.

For reinsurance contracts held, reinsurance contract income (amounts recovered) and expenses (premiums paid over and other related expense) are disclosed separately on the face of the income statement, but alternatively may be presented as a single figure with the split in the related note. Insurance revenue might therefore not be reduced by premiums forwarded to reinsurance companies.

Portfolio of insurance and reinsurance contracts are recognised and presented separately as assets and liabilities. The following insurance assets and liabilities needs to be presented separately on the face of the statement of financial position:

1. Insurance contracts assets/liabilities
2. Reinsurance contracts held assets/liabilities
3. Acquisition cost assets/liabilities

The split of the insurance liability between the liability for remaining coverage and the liability for incurred claims are therefore made in the notes. Similarly, for reinsurance contract the split between the asset for remaining coverage and asset for incurred claims are also made in the notes. An acquisition cost asset (liability) is only created for acquisition cost incurred before the related contract is recognised. If the related contract is recognised, the acquisition cost is deducted from the residual margin for the fulfilment value approach and from the unearned premiums for the premium allocation approach (if not expensed immediately).

Disclosure

The disclosure objective is to provided information, together with the presentation, that gives a basis to assess the effect of insurance contract and related contracts in the scope of IFRS on the financial position, financial performance and cash flows of an entity. In achieving the objective quantitative and qualitative information are provided regarding:

1. Amounts recognised in the financial statements.
2. Significant judgements and changes in those judgements.
3. The nature and extend of risks in insurance and related contracts.

IFRS 17 provides detail disclosure regarding each of these aspects.

Transition

IFRS 17 should be applied retrospectively on transition. However, if impracticable, a modified retrospective approach or a fair value approach may be applied. Special transition rules are also applicable if an entity applies IFRS 17 and IFRS 19 for the first time on the same date.