IFRS-4 INSURANCE CONTRACT

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 INTRODUCTION TO IFRS -4 INSURANCE CONTRACT

An insurance contract is 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."
IFRS 4 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 Standards. 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.
Furthermore, it does not address accounting by policyholders.

IFRS 4 Insurance Contracts provides guidance on the accounting

treatment of all insurance contracts except for specific contracts
covered by other standards. The standard was published in March
2004 and is effective from 1 January 2005. Withdrawn for periods
starting on or after 1 January 2023 when IFRS 4 is superseded by
IFRS 17 Insurance Contracts.

IFRS 4 exempts an insurer temporarily (ie until it adopts IFRS 17)

from some requirements of other Standards, including the requirement
to consider the Conceptual Framework in selecting accounting
policies for insurance contracts. However, IFRS 4:

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  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);

 requires a test for the adequacy of recognised insurance

liabilities and an impairment test for reinsurance assets; and

 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.
A 2016 amendment to IFRS 4 addresses some consequences of
applying IFRS 9 before an entity adopts IFRS 17.

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DEFINITION OF INSURANCE CONTRACT

An insurance contract is 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." [IFRS 4.Appendix A]

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NEED FOR AN INTERNATIONAL STANDARD ON
INSURANCE

 Diversity in accounting practice for insurance contracts internationally

 Accounting practices for insurance contracts differ from practices in other

sectors

 Other IFRSs do not address accounting for insurance contracts

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OVERVIEW OF IFRS 4

 Defines an insurance contract and focuses on types of contracts rather than

types of entities
 Applies to:
* Insurance contracts, including reinsurance contracts, that an entity issues
* Reinsurance contracts that an entity holds
* Financial instruments issued with a discretionary participation features

• Does not address accounting by policy holders

• Does not apply to other assets and other liabilities of an insurer, such as
financial assets and financial liabilities within the scope of IAS 39/ IFRS 9

 Generally insurers are required to continue their existing accounting policies

with respect to insurance contracts except where the standard requires or
permits changes in accounting policies

 Requires some embedded derivatives and some deposit components to be

separated from insurance contracts

 Requires a minimum liability adequacy test to be applied to recognized

insurance liabilities

 Requires significant disclosures of the terms, conditions and risk related to

insurance contracts, consistent in principle with those required for financial
assets and liabilities

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 SCOPE
• Applies to insurance contracts
• Applies to reinsurance assets held by the insurer
•Applies to financial instruments with discretionary
participation feature if they have been issued by the insurer

SCOPE EXEMPTION

• Product warranties issued directly by a manufacturer, dealer or

retailer
• Employers assets and liabilities under employee benefit plans
• Contractual right and obligations contingent on future use or right
to use a non-financial item (e.g. some royalties) and lessee’s
residual value guarantee embedded in a finance lease
• Financial guarantee contracts, except for contracts previously
accounted for as insurance contracts in respect of which issuer
may choose to apply IAS 39/IFRS 9
• Contingent consideration payable or receivable in a business
combination
• Direct insurance contracts held by policyholder

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OVERVIEW OF IASB & FASB JOINT INSURANCE
PROJECT

Phase 1
• Objective was to:
* Make limited improvements to accounting for insurance
contacts
* Provide disclosures that identify and explain amounts in an
insurer's financial statements arising from insurance contracts
and provide information about the amount, timing and
uncertainty of future cash flows from insurance contracts until
the board completes phase II
Resulted in IFRS 4 Insurance contracts, an interim standard
that permits a wide variety of accounting practices for
insurance contracts.

Phase II
• Currently ongoing

• Objective is to develop a standard to replace the interim

insurance standard and to provide a basis for consistent
accounting for insurance contracts in the longer term

• Joint project with FASB

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• DP Preliminary view on insurance contracts published in
May 2007

• ED expected in near future

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Insurance contracts project
Accounting practices for insurance contracts have been
diverse, and have often differed from practices in other
industries. IFRS 4, ‘Insurance contracts’, (IFRS 4) deals with
insurance contracts. It was intended to make limited
improvements to accounting for insurance contracts and to
provide disclosure requirements. IFRS 4 is an interim
standard and it will be replaced by IFRS 17 ‘Insurance
contracts’ (previously known as IFRS 4 phase II).
On 12 September 2016, the IASB published an amendment to
IFRS 4 which addresses the concerns of insurance companies
about the different effective dates of IFRS 9, ‘Financial
instruments’, and IFRS 17. The amendment to IFRS 4
provides two different solutions for insurance companies: a
temporary exemption from IFRS 9 for some entities that meet
specific requirements (applied at the reporting entity level)
and the ‘overlay approach’. Both approaches are optional.
IFRS 4 (including the amendments that now have been
issued) will be superseded by IFRS 17. Accordingly, both the
temporary exemption and the ‘overlay approach’ are expected
to cease to be applicable when the new insurance standard
becomes mandatory for periods beginning on or after 1
January 2023.

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Overview
Insurance contracts are contracts where an entity accepts
significant insurance risk from another party (the
policyholder) by agreeing to compensate the policyholder if
the insured event adversely affects the policyholder. The risk
transferred in the contract must be insurance risk, which is
any risk except for financial risk.
IFRS 4 applies to all issuers of insurance contracts whether or
not the entity is legally an insurance company. It does not
apply to accounting for insurance contracts by policyholders.
IFRS 4 was designed as an interim standard. It allows entities
to continue with their existing accounting policies for
insurance contracts if those policies meet certain minimum
criteria. One of the minimum criteria is that the amount of the
insurance liability is subject to a liability adequacy test. This
test considers current estimates of all contractual and related
cash flows. If the liability adequacy test identifies that the
insurance liability is inadequate, the entire deficiency is
recognised in the income statement. IFRS 17 will replace
IFRS 4 and will apply to annual periods beginning on or after
1 January 2023.
Accounting policies modelled on IAS 37, 'Provisions,
contingent liabilities and contingent assets', are appropriate in
cases where the issuer is not an insurance company and where
there is no specific local GAAP for insurance contracts (or the
local GAAP is only directed at insurance companies).

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Disclosure is particularly important for information relating to
insurance contracts, as entities can continue to use local
GAAP accounting policies for measurement. IFRS 4 has two
main principles for disclosure. Entities should disclose:
 Information that identifies and explains the amounts in
its financial statements arising from insurance contracts.
 Information that enables users of its financial statements
to evaluate the nature and extent of risks arising from
insurance contracts.

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The IFRS:
 Prohibits provisions for possible claims under contracts
not in existence at the reporting date
 Requires a test for the adequacy of recognised insurance
liabilities
 Requires an impairment test for reinsurance assets
 Requires an insurer to keep insurance liabilities in its
statement of financial position (balance sheet) until they
are discharged, cancelled or expire
 Prohibits the offsetting of insurance liabilities against
related reinsurance assets. The IFRS also prohibits the
introduction of the following practices although allows
their continued use where used previously:
o Measuring insurance liabilities on an undiscounted
basis
o Measuring contractual rights to future investment
management fees at an amount that exceeds their
fair value
o Using non-uniform accounting policies for the
insurance liabilities of subsidiaries

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Current proposals
ED/2019/4 Amendments to IFRS 17 was issued in June 2019.
One of the proposed amendments defers the effective date
until 1 January 2022. As a consequence, references to the
effective date of IFRS 17 within IFRS 4 are amended,
specifically in the context of the temporary exemption from
IFRS 9.

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TIMELINE
DATE UPDATE

27 August ASB completes response to IBOR reform with

2020 amendments to IFRS Standards

18 May These amendments complement those issued in 2019

2017 and focus on changes to contractual cash flows, hedge
accounting, and disclosures. Interest Rate Benchmark
Reform - Phase 2 amends IFRS 9, IAS 39, IFRS 7, IFRS
4 and IFRS 16.
12 IASB issues IFRS 17 which will replace IFRS 4
Septembe
r 2016
9 IASB issues Applying IFRS 9 with IFRS 4 amendments
December to IFRS 4
2015
30 July Applicable when IFRS 9 is first applied (overlay
2010 approach) or for annual periods beginning on or after 1
January 2018 (deferral approach). Press release issued
on 12 September 2016 announcing amendments to IFRS
4. Amendments address concerns surrounding the
implementation of IFRS 9.
18 August IASB proposes amendments to the current Insurance
2005 Contracts Standard to provide temporary reliefs for
insurers
31 March Press release issued on 9 December 2015 announcing
2004 amendments to address the temporary consequences of
the different effective dates for IFRS 9 and the new
insurance contracts standard that will replace IFRS 4.

IFRS-17 INSURANCE CONTRACT

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IFRS 17 is effective for annual reporting periods beginning
on or after 1 January 2023 with earlier application permitted
as long as IFRS 9 is also applied.
Insurance contracts combine features of both a financial
instrument and a service contract. In addition, many insurance
contracts generate cash flows with substantial variability over
a long period. To provide useful information about these
features, IFRS 17:
 combines current measurement of the future cash flows
with the recognition of profit over the period that
services are provided under the contract;
 presents insurance service results (including presentation
of insurance revenue) separately from insurance finance
income or expenses; and
 requires an entity to make an accounting policy choice of
whether to recognise all insurance finance income or
expenses in profit or loss or to recognise some of that
income or expenses in other comprehensive income.

The key principles in IFRS 17 are that an entity:

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 identifies as insurance contracts those contracts under
which the entity 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;
 separates specified embedded derivatives, distinct
investment components and distinct performance
obligations from the insurance contracts;
 divides the contracts into groups that it will recognise
and measure;
 recognises and measures groups of insurance contracts
at:
i. a risk-adjusted present value of the future cash
flows (the fulfilment cash flows) that incorporates
all of the available information about the fulfilment
cash flows in a way that is consistent with
observable market information; plus (if this value is
a liability) or minus (if this value is an asset)
ii. an amount representing the unearned profit in the
group of contracts (the contractual service margin);
 recognises the profit from a group of insurance contracts
over the period the entity provides insurance contract
services, and as the entity is released from risk. If a
group of contracts is or becomes loss-making, an entity
recognises the loss immediately;
 presents separately insurance revenue (that excludes the
receipt of any investment component), insurance service
expenses (that excludes the repayment of any investment
components) and insurance finance income or expenses;
and

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  discloses information to enable users of financial
statements to assess the effect that contracts within the
scope of IFRS 17 have on the financial position, financial
performance and cash flows of an entity.
IFRS 17 includes an optional simplified measurement
approach, or premium allocation approach, for simpler
insurance contracts.

Four Key Concepts of IFRS-17

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Building Block Approach ("BBA")
The approach for valuing insurance contracts/portfolio of
insurance contracts.This consists of four blocks
Premium Allocation Approach ("PAA")
A modified approach for some short duration insurance
contracts (≤1 year)
Onerous Contracts Test ("OCT")
A test of whether a portfolio of insurance contracts is loss
making
Portfolio of insurance contracts
Portfolio composition is very important – it plays a vital role
in calculating diversification, the onerous contracts test rules
and the risk margin.

Some examples of Insurance Contracts

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 • Property or material damage
• Business interruption consequent upon material damage
• Product liability, professional indemnity, third party
liability and legal expenses or legal protection insurance
• Life insurance, life-contingent annuities or pensions
• Product warranties, provided the warranty is issued by
another party for goods sold by a manufacturer,
otherwise, IAS 18 and IAS 37 will apply.
• Reinsurance contracts

Contracts not classified as insurance Contracts

• Investment contracts with no significant insurance risk (for

example, life policies with no significant mortality risk)
• Credit guarantee that engages Insurer’s liability if a debtor
defaults notwithstanding whether the policyholder has
incurred a loss.
 

Disclosures
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• Detail information about insurance risk exposures,
possible risk concentration and the impact of changes in
key variables on the key assumptions used;
• Information about amount, timing and uncertainty of
future cash flows
• Terms and conditions of contracts that have material;
effect on the timing, amount and uncertainty of future
cash-flows
• Information about actual claims compared to previous
estimates
• Information about interest and credit rate risks in line
with IAS 32, Financial instruments Presentation;
• Disclosure of gains and losses from purchasing
reinsurance contracts such as Profit commission.

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IFRS - Acronyms

• IFRS - International Financial Reporting Standards

• IASB - International Accounting Standards Board

• FASB - Financial Accounting Standards Board (the US)

Criticism

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6 of the 14 IASB board members dissented from issuing IFRS
4. Board members James J.Leisenring, Mary E. Barth, Robert
P. Garnett, Gilbert Gélard and John T. Smith dissented
because they disagreed with the temporary exemption from
the accounting policy changes of IAS 8. Leisenring, Barth,
Garnett and Smith further objected to the certain practices
permitted by IFRS 4 related to the accounting for assets
backing insurance companies, including shadow accounting.
eisenring, Barth and Smith also objected to the inclusion of
financial instruments with discretionary participation features
within IFRS 4 rather than within the accounting guidance for
financial instruments (which at the time was IAS 39), and
Smith raised other objections as well, including the exception
to separately measure embedded derivatives that meet the
definition of insurance. Board member Tatsumi Yamada
dissented separately because he did not believe that IFRS 4
appropriately addressed mismatches between the accounting
for insurance contracts and the assets backing the insurance
contracts.
Leisenring continued to criticize IFRS 4 after its issue,
including a statement that “IFRS 4 is a gift of the IASB to the
insurance community that keeps on giving.

REFERENCE

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Websites
 https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-4-insurance-contracts/ 5 December 2020
th

 https://www.actuaries.org.uk/system/files/documents/
pdf/b4-ifrs-4-beginners-everything-you-ever-wanted-
know-were-afraid-ask.pdf 5 December 2020
th

 https://inform.pwc.com/inform2/show?
action=informContent&id=0830050711090001 5th
December 2020

 https://www.slideshare.net/AbhishekChhapolika/ifrs-
4-64396584 8 December 2020
th

 https://en.wikipedia.org/wiki/IFRS_4 8 th
December 2020

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