PRACTICAL GUIDE

IFRS 4: INSURANCE CONTRACTS

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 PRACTICAL GUIDE

IFRS 4 Insurance Contracts

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
Our only goal is to
an insurer) until the Board completes the second phase of its project on insurance
exceed your
expectations
contracts. In particular, this IFRS requires:

(a) limited improvements to accounting by insurers for insurance contracts.

(b) 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.

An insurance contract is a contract under which one party (the insurer) accepts
Over 4,000 accounting significant insurance risk from another party (the policyholder) by agreeing to
questions and answers compensate the policyholder if a specified uncertain future event (the insured event)
"online" on IFRS adversely affects the policyholder.

The IFRS applies to all insurance contracts (including reinsurance contracts) that an
entity issues and to reinsurance contracts that it holds, except for specified contracts
covered by other IFRSs. It does not apply to other assets and liabilities of an insurer,
such as financial assets and financial liabilities within the scope of IFRS 9 Financial
Instruments. Furthermore, it does not address accounting by policyholders.

The IFRS exempts an insurer temporarily (ie during phase I of this project) from some
requirements of other IFRSs, including the requirement to consider
the Framework in selecting accounting policies for insurance contracts. However, the
Quality, excellence, and IFRS:
dedication, our key
intangible asset (a) prohibits provisions for possible claims under contracts that are not in existence
at the end of the reporting period (such as catastrophe and equalisation provisions).

(b) requires a test for the adequacy of recognised insurance liabilities and an
impairment test for reinsurance assets.

(c) requires an insurer to keep insurance liabilities in its statement of financial

position until they are discharged or cancelled, or expire, and to present insurance
liabilities without offsetting them against related reinsurance assets

The IFRS permits an insurer to change its accounting policies for insurance contracts
only if, as a result, its financial statements present information that is more relevant

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and no less reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce
any of the following practices, although it may continue using accounting policies that involve them:

(a) measuring insurance liabilities on an undiscounted basis.

(b) 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.

(c) using non-uniform accounting policies for the insurance liabilities of subsidiaries.

The IFRS permits the introduction of an accounting policy that involves remeasuring designated
insurance liabilities consistently in each period to reflect current market interest rates (and, if the
insurer so elects, other current estimates and assumptions). Without this permission, an insurer
would have been required to apply the change in accounting policies consistently to all similar
liabilities.

The IFRS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise from insurance contracts.

(b) the nature and extent of risks arising from insurance contracts.

Practical Guidance in order to determinate if life contingent annuity is within scope IFRS 4

Life-contingent annuity. Insurance contract (unless contingent

amount is insignificant in all scenarios that
have commercial substance). Insurer could
suffer a significant loss on an individual
contract if the annuitant survives longer than
expected.

Pure endowment. The insured person
receives a payment on survival to a
specified date, but beneficiaries receive
nothing if the insured person dies before
then.
Insurance contract (unless the transfer of
insurance risk is insignificant). If a relatively
homogeneous book of pure endowments is
known to consist of contracts that all transfer
insurance risk, the insurer may classify the
entire book as insurance contracts without
examining each contract to identify a few
non-derivative pure endowments that
transfer insignificant insurance risk (see
paragraph B25).

Deferred annuity: policyholder will Insurance contract (unless the transfer of

receive, or can elect to receive, a life- insurance risk is insignificant). The contract

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 contingent annuity at rates guaranteed at transfers mortality risk to the insurer at
inception. inception, because the insurer might have to
pay significant additional benefits for an
individual contract if the annuitant elects to
take the life-contingent annuity and survives
longer than expected (unless the contingent
amount is insignificant in all scenarios that
have commercial substance).

Deferred annuity: policyholder will Not an insurance contract at inception, if the

receive, or can elect to receive, a life-
contingent annuity at rates prevailing
when the annuity begins.
insurer can reprice the mortality risk without
constraints. Within the scope of IAS 39
Financial Instruments: Recognition and
Measurement unless the contract contains a
discretionary participation feature. Will
become an insurance contract when the
annuity rate is fixed (unless the contingent
amount is insignificant in all scenarios that
have commercial substance).

The Technical summary has been prepared by IFRS Foundation staff and has not been approved by the IASB. For the requirements reference must be
made to International Financial Reporting Standard which can be obtained if pay the subscription to IASB – www.ifrs.org

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