International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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the treatment of related intangible assets; and
(l) the judgements, apart from those involving estimations, management has made in
the process of applying the accounting policies that have the most significant effect
on the amounts recognised in the financial statements as required by IAS 1. The
classification of a DPF is an example of an accounting policy that might have a
significant effect. [IFRS 4.IG17].
Because an insurer’s accounting policies will normally be based on its previous local
GAAP, the policies for such items will vary from entity to entity.
4374 Chapter 51
Set out below are the accounting policies for premiums and claims for Aviva. These are
based on UK GAAP which has different requirements for recognition of premiums from
life and general (non-life) insurance business.
Extract 51.12: Aviva plc (2016)
Accounting policies [extract]
(H) Premiums earned
Premiums on long-term insurance contracts and participating investment contracts are recognised as income when
receivable, except for investment-linked premiums which are accounted for when the corresponding liabilities are
recognised. For single premium business, this is the date from which the policy is effective. For regular premium contracts, receivables are recognised at the date when payments are due. Premiums are shown before deduction of commission and
before any sales-based taxes or duties. Where policies lapse due to non-receipt of premiums, then all related premium
income accrued but not received from the date they are deemed to have lapsed is offset against premiums.
General insurance and health premiums written reflect business incepted during the year, and exclude any sales-based
taxes or duties. Unearned premiums are those proportions of the premiums written in a year that relate to periods of
risk after the statement of financial position date. Unearned premiums are calculated on either a daily or monthly pro
rata basis. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from
underwriting or past experience, and are included in premiums written.
Deposits collected under investment contracts without a discretionary participation feature (non-participating contracts) are not accounted for through the income statement, except for fee income (covered in accounting policy I) and the
investment income attributable to those contracts, but are accounted for directly through the statement of financial
position as an adjustment to the investment contract liability.
(L) Insurance and participating investment contract liabilities [extract]
Claims
Long-term business claims reflect the cost of all claims arising during the year, including claims handling costs, as
well as policyholder bonuses accrued in anticipation of bonus declarations.
General insurance and health claims incurred include all losses occurring during the year, whether reported or not,
related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims
outstanding from previous years.
Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement
of claims. Internal costs include all direct expenses of the claims department and any part of the general administrative costs directly attributable to the claims function.
Long-term business provisions
Under current IFRS requirements, insurance and participating investment contract liabilities are measured using
accounting policies consistent with those adopted previously under existing accounting practices, with the exception
of liabilities remeasured to reflect current market interest rates to be consistent with the value of the backing assets, and those relating to UK with-profit and non-profit contracts.
The long-term business provisions are calculated separately for each life operation, based either on local regulatory
requirements or existing local GAAP (at the later of the date of transition to IFRS or the date of acquisition of the entity); and actuarial principles consistent with those applied in each local market. Each calculation represents a determination
within a range of possible outcomes, where the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are disclosed in note 40(b). For the UK with-profit funds, FRS 27 required liabilities to be calculated on the realistic basis adjusted to remove the shareholders’ share of future bonuses. FRS 27 was grandfathered from UK regulatory requirements prior to the adoption of Solvency II. For UK non-profit insurance
contracts, the liabilities are calculated using the gross premium valuation method. This method uses the amount of
contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity,
persistency and future expenses. These assumptions are set on a prudent basis and can vary by contract type and reflect
current and expected future experience. The liabilities are based on the UK regulatory requirements prior to the adoption of Solvency II, adjusted to remove certain regulatory reserves and margins in assumptions, notably for annuity business.
Insurance contracts (IFRS 4) 4375
General insurance and health provisions [extract]
Outstanding claims provisions [extract]
General insurance and health outstanding claims provisions are based on the estimated ultimate cost of all claims
incurred but not settled at the statement of financial position date, whether reported or not, together with related
claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general
insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the
ultimate cost of which cannot be known with certainty at the statement of financial position date. As such, booked
claim provisions for general insurance and health insurance are based on the best estimate of the cost of future claim
payments plus an explicit allowance for risk and uncertainty. Any estimate represents a determination within a range
of possible outcomes. Further details of estimation techniques are given in note 40(c).
Provisions for latent claims and claims that are settled on an annuity type basis such as structured settlements are
discounted, in the relevant currency at the reporting date, having regard to the expected settlement dates of the claims
and the nature of the liabilities. The discount rate is set at the start of the accounting period with any change in rates between the start and end of the accounting period being reflected below operating profit as an economic assumption
change. The range of discount rates used is described in note 40(c)(ii).
Provision for unearned premiums
The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent
periods is deferred as a provision for unearned premiums. The change in this provision is taken to the income
statement as recognition of revenue over the period of risk.
The following example from Allianz illustrates an accounting policy for reinsurance
contracts based on US GAAP.
Extract 51.13: Allianz SE (2016)
Notes to the consolidated financial statements [extract]
2 – Accounting policies and new accounting pronouncements [extract]
Summary of significant accounting policies [extract]
Reinsurance contracts
The Allianz Group’s consolidated financial statements reflect the effects of ceded
and assumed reinsurance contracts. Assumed reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are
accounted for in accordance with the conditions of the reinsurance contracts, and in consideration of the original contracts for which the reinsurance was concluded. When the reinsurance contracts do not transfer significant insurance risk, deposit
accounting is applied as required under the related reinsurance accounting provisions of US GAAP or under IAS 39.
An example of an accounting policy showing a split of contracts with a DPF between
liability and equity (AMP) is shown at 6.1 above.
An example of an accounting policy for a liability adequacy test (Allianz) is shown
at 7.2.2.A above.
An example of an accounting policy for salvage and subrogation (Royal & SunAlliance)
is shown at 7.2.6.E above.
If the financial statements disclose supplementary information, for example embedded value
information, that is not prepared on the basis used for other measurements in the financial
statements, it would be appropriate to explain the basis of preparation. Disclosures about
embedded value methodology might include information similar to that described above, as
well as disclosure of whether, and how, embedded values are affected by estimated returns
from assets and by locked-in capital and how those effects are estimated. [IFRS 4.IG18].
4376 Chapter 51
11.1.2 Recognised
assets,
liabilities, income and expense
As noted at 11.1 above, IFRS 4 requires disclosure of the recognised assets, liabilities,
income and expense (and cash flows if using the direct method) arising from insurance
contracts. [IFRS 4.37(b)].
11.1.2.A
Assets and liabilities
IAS 1 requires minimum disclosures on the face of the statement of financial position. [IAS 1.54].
In order to satisfy these requirements, an insurer may need to present separately on the face
of its statement of financial position the following amounts arising from insurance contracts:
(a) liabilities under insurance contracts and reinsurance contracts issued;
(b) assets
under
insurance contracts and reinsurance contracts issued; and
(c) assets under reinsurance contracts ceded which, as discussed at 7.2.4 above, should
not be offset against the related insurance liabilities. [IFRS 4.IG20].
Neither IAS 1 nor IFRS 4 prescribe the descriptions and ordering of the line items
presented on the face of the statement of financial position. An insurer could amend the
descriptions and ordering to suit the nature of its transactions. [IFRS 4.IG21].
IAS 1 requires the presentation of current and non-current assets and liabilities as separate
classifications on the face of the statement of financial position except where a presentation
based on liquidity provides information that is reliable and more relevant. [IAS 1.60]. In practice,
a current/non-current classification is not normally considered relevant for insurers, and they
usually present their IFRS statements of financial position in broad order of liquidity.
IAS 1 permits disclosure, either on the face of the statement of financial position or in
the notes, of sub-classifications of the line items presented, classified in a manner
appropriate to the entity’s operations. The appropriate sub-classifications of insurance
liabilities will depend on the circumstances, but might include items such as:
(a) unearned
premiums;
(b) claims reported by policyholders;
(c) claims incurred but not reported (IBNR);
(d) provisions arising from liability adequacy tests;
(e) provisions for future non-participating benefits;
(f) liabilities or components of equity relating to discretionary participating features.
If these are classified as a component of equity IAS 1 requires disclosure of the
nature and purpose of each reserve within equity;
(g) receivables and payables related to insurance contracts (amounts currently due to
and from agents, brokers and policyholders); and
(h) non-insurance assets acquired by exercising rights to recoveries. [IFRS 4.IG22].
Similar sub-classifications may also be appropriate for reinsurance assets, depending on
their materiality and other relevant circumstances. For assets under insurance contracts
and reinsurance contracts issued an insurer might need to distinguish:
(a) deferred
acquisition costs; and
(b) intangible assets relating to insurance contracts acquired in business combinations
or portfolio transfers. [IFRS 4.IG23].
Insurance contracts (IFRS 4) 4377
If non-uniform accounting policies for the insurance liabilities of subsidiaries are
adopted, it might be necessary to disaggregate the disclosures about the amounts
reported to give meaningful information about amounts determined using different
accounting policies. [IFRS 4.IG30].
Munich Re’s gross technical provisions on the face of the statement of financial position
are illustrated below, together with some further detail shown in selected notes.
Extract 51.14: Münchener Rückversicherungs – Gesellschaft Aktiengesellschaft (2016)
Consolidated balance sheet [extract]
Equity and liabilities [extract]
Notes
31.12.2016
Prev.
year
Change
€m €m €m €m %
C. Gross technical provisions
I. Unearned premiums
(20)
8,984
8,841
143
1.6
II. Provision for future policy benefits
(21)
108,108
108,572
–463
–0.4
III. Provision for outstanding claims
(22)
61,362
59,756
1,606
2.7
IV. Other technical provisions
(23)
19,026
17,413
1,612
9.3
197,480 194,582 2,898
1.5
D. Gross technical provisions for
unit-linked life insurance
(24)
8,429 8,201 228 2.8
21 Provision for future policy benefits [extract]
Gross provision for future policy benefits according to type of insurance cover
€m
31.12.2016 Prev.
year
Life
74,878 77,142
Reinsurance
11,206
12,924
ERGO
63,672
64,218
Term life insurance
3,363
3,293
Other life insurance
26,718
28,343
Annuity
insurance
32,268
31,277
Disability
insurance
1,292
1,281
Contracts with combination of more than one risk
31
25
Health
32,558 30,962
Munich Health
1,196
1,118
ERGO
31,362
29,844
Property-casualty
672 468
Reinsurance
26
26
&
nbsp; ERGO
646
442
Total
108,108 108,572
The provision for future policy benefits in life reinsurance largely involves contracts where the mortality or morbidity
risk predominates. In reinsurance, annuity contracts have a significantly lower weight than in primary insurance.
Essentially the same actuarial assumptions have been used as in the previous year for measuring the provisions for
future policy benefits for business in force.
In the ERGO Life and Health Germany segment, there was an adjustment in 2016 to the assumptions regarding future
lapses, future administration expenses, and to long-term interest-rate levels that are geared to the long-term regular
return on investments. This resulted in an increase to the provision for future policy benefits.
Further information on the underwriting risks can be found in the risk report in the section “Significant Risks”.
4378 Chapter 51
CNP Assurances provided the following analysis of its insurance and financial liabilities.
Extract 51.15: CNP Assurances (2016)
ASSETS, EQUITY AND LIABILITIES [extract]
Note 10
Analysis of insurance and financial liabilities [extract]
The following tables show the sub-classifications of insurance liabilities that require separate disclosure under IFRS.
10.1.1
Analysis of insurance and financial liabilities at 31 December 2016 [extract]
Before
Net of
(in € millions)
reinsurance
reinsurance Reinsurance
Non-life technical reserves
8,372.9
6,917.1
1,455.8
Unearned premium reserves
892.0
802.8
89.2
Outstanding claims reserves
5,480.8
4,400.1
1,080.7
Bonuses and rebates (including claims equalisation
reserve on group business maintained in liabilities)