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IFRS 4-Insurance Contracts

Objective

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:

  • limited improvements to accounting by insurers for insurance contracts.
  • 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.

Scope

An entity shall apply this IFRS to:

  • insurance contracts (including reinsurance contracts) that it issues and reinsurance contracts that it holds.
  • financial instruments that it issues with a discretionary participation feature (see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires disclosure about financial instruments, including financial instruments that contain such features.

Recognition and measurement

Paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors specify criteria for an entity to use in developing an accounting policy if no IFRS applies specifically to an item. However, this IFRS exempts an insurer from applying those criteria to its accounting policies for:

  • insurance contracts that it issues (including related acquisition costs and related intangible assets, such as those described in paragraphs 31 and 32); and
  • reinsurance contracts that it holds

Defined terms

cedant The policyholder under a reinsurance contract

deposit component A contractual component that is not accounted for as a derivative under IAS 39 and would be within the scope of IAS 39 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:

  1. that are likely to be a significant portion of the total contractual benefits;
  2. whose amount or timing is contractually at the discretion of the issuer; and (c) that are contractually based on:
  • the performance of a specified pool of contracts or a specified type of contract;
  • realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or
  • the profit or loss of the company, fund or other entity that issues the contract.

fair value The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

financial guarantee contract A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

financial risk The risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.

guaranteed benefits Payments or other benefits to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the issuer.

guaranteed element An obligation to pay guaranteed benefits, included in a contract that contains a discretionary participation feature.

insurance asset An insurer’s net contractual rights under an insurance contract.

insurance contract 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. (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 if an insured event occurs

reinsurance assets A cedant’s net contractual rights under a reinsurance contract.

reinsurance contract An insurance contract issued by one insurer (the reinsurer) to compensate another insurer (the cedant) for losses on one or more contracts issued by the cedant.

reinsurer The party that has an obligation under a reinsurance contract to compensate a cedant if an insured event occurs.

unbundle Account for the components of a contract as if they were separate contracts.

Disclosure

An insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts.

An entity need not apply the disclosure requirements in this IFRS to comparative information that relates to annual periods beginning before 1 January 2005, except for the disclosures required by paragraph 37(a) and (b) about accounting policies, and recognised assets, liabilities, income and expense (and cash flows if the direct method is used).