otherwise be adversely affected by his or her survival);
• insurance against disability and medical costs;
• surety bonds, fidelity bonds, performance bonds and bid bonds (i.e. contracts that
provide compensation if another party fails to perform a contractual obligation, for
example an obligation to construct a building);
Insurance contracts (IFRS 17) 4451
• product warranties issued by another party for goods sold by a manufacturer,
dealer or retailer are within the scope of IFRS 17. However, as discussed
at 2.3.1.A above, product warranties issued directly by a manufacturer, dealer or
retailer are outside the scope of IFRS 17 and are instead within the scope of
IFRS 15 or IAS 37;
• title insurance (insurance against the discovery of defects in title to land that were
not apparent when the insurance contract was issued). In this case, the insured
event is the discovery of a defect in the title, not the defect itself;
• travel assistance (compensation in cash or in kind to policyholders for losses
suffered in advance of, or during travel);
• catastrophe bonds that provide for reduced payments of principal, interest or both
if a specified event adversely affects the issuer of the bond (unless the specified
event does not create significant insurance risk, for example if the event is a change
in an interest rate or a foreign exchange rate); and
• insurance swaps and other contracts that require a payment based on changes
in climatic, geological and other physical variables that are specific to a party to
the contract;
These examples are not intended to be an exhaustive list.
The following illustrative examples, based on examples contained previously in IFRS 4,
provide further guidance on situations where there is significant insurance risk:
Example 52.6: Guarantee fund established by contract
A guarantee fund is established by contract. The contract requires all participants to pay contributions to the
fund so that it can meet obligations incurred by participants (and, perhaps, others). Participants would
typically be from a single industry, e.g. insurance, banking or travel.
The contract that establishes the guarantee fund is an insurance contract.
This example contrasts with Example 52.10 below where a guarantee fund has been established by law and
not by contract.
Example 52.7: No market value adjustment for maturity benefits
A contract permits the issuer to deduct a market value adjustment (MVA), a charge which varies depending
on a market index, from surrender values or death benefits to reflect current market prices for the underlying
assets. The contract does not permit the issuer to deduct a MVA for maturity benefits.
The policyholder obtains an additional survival benefit because no MVA is applied at maturity. That benefit
is a pure endowment because the insured person receives a payment on survival to a specified date but
beneficiaries receive nothing if the insured person dies before then. If the risk transferred by that benefit is
significant, the contract is an insurance contract.
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Example 52.8: No market value adjustment for death benefits
A contract permits the issuer to deduct a MVA from surrender values or maturity payments to reflect current
market prices for the underlying assets. The contract does not permit the issuer to deduct a MVA for death benefits.
The policyholder obtains an additional death benefit because no MVA is applied on death. If the risk
transferred by that benefit is significant, the contract is an insurance contract.
3.7.2
Examples of transactions that are not insurance contracts
The following are examples of transactions that are not insurance contracts: [IFRS 17.B27]
• investment contracts that have the legal form of an insurance contract but do not
transfer significant insurance risk to the issuer. For example, life insurance
contracts in which the insurer bears no significant mortality or morbidity risk are
not insurance contracts. Investment contracts with discretionary participation
features do not meet the definition of an insurance contract; however, they are
within the scope of IFRS 17 provided they are issued by an entity that also issues
insurance contracts (see 11 below);
• contracts that have the legal form of insurance, but return all significant risk back
to the policyholder through non-cancellable and enforceable mechanisms that
adjust future payments by the policyholder as a direct result of insured losses, for
example, some financial reinsurance contracts or some group contracts. Such
contracts are normally financial instruments or service contracts;
• self-insurance, in other words retaining a risk that could have been covered by
insurance. See 3.2.2.A above;
• contracts (such as gambling contracts) that require a payment if an unspecified
uncertain future event occurs, but do not require, as a contractual precondition for
payment, that the event adversely affects the policyholder. However, this does not
preclude the specification of a predetermined payout to quantify the loss caused
by a specified event such as a death or an accident. See 3.6.1 above;
• derivatives that expose one party to financial risk but not insurance risk, because
the derivatives require that party to make payment based solely on the changes in
one or more of a specified interest rate, a financial instrument price, a commodity
price, a foreign exchange rate, an index of prices or rates, a credit rating or a credit
index or other variable, provided that, in the case of a non-financial variable, the
variable is not specific to a party to the contract;
• credit-related guarantees that require payments even if the holder has not incurred
a loss on the failure of a debtor to make payments when due;
• contracts that require a payment that depends on a climatic, geological or any other
physical variable not specific to a party to the contract (commonly described as
weather derivatives); and
• contracts that provide for reduced payments of principal, interest or both, that
depend on a climatic, geological or any other physical variable that is not specific
to a party to the contract (commonly referred to as catastrophe bonds).
Insurance contracts (IFRS 17) 4453
An entity should apply other IFRSs, such as IFRS 9 and IFRS 15, to the contracts
described above. [IFRS 17.B28].
The credit-related guarantees and credit insurance contracts referred to above can have
various legal forms, such as that of a guarantee, some types of letters of credit, a credit
default contract or an insurance contract. As discussed at 2.3.1.E above, those contracts
are insurance contracts if they require the issuer to make specified payments to
reimburse the holder for a loss that the holder incurs because a specified debtor fails to
make payment when due to the policyholder applying the original or modified terms of
a debt instrument. However, such insurance contracts are excluded from the scope of
IFRS 17 unless the issuer has previously asserted explicitly that it regards the contracts
as insurance contracts and has used accounting applicable to insurance contracts.
[IFRS 17.B29].
C
redit-related guarantees and credit insurance contracts that require payment, even if
the policyholder has not incurred a loss on the failure of the debtor to make payments
when due, are outside the scope of IFRS 17 because they do not transfer significant
insurance risk. Such contracts include those that require payment: [IFRS 17.B30]
• regardless of whether the counterparty holds the underlying debt instrument; or
• on a change in the credit rating or the credit index, rather than on the failure of a
specified debtor to make payments when due.
The following examples, based on examples contained previously in IFRS 4, illustrate
further situations where IFRS 17 is not applicable.
Example 52.9: Investment contract linked to asset pool
Entity A issues an investment contract in which payments are contractually linked (with no discretion) to
returns on a pool of assets held by the issuer (Entity A).
This contract is within the scope of IFRS 9 because the payments are based on asset returns and there is no
transfer of significant insurance risk.
Example 52.10: Guarantee fund established by law
Guarantee funds established by law exist in many jurisdictions. Typically they require insurers to contribute
funds into a pool in order to pay policyholder claims in the event of insurer insolvencies. They may be funded
by periodic (usually annual) levies or by levies only when an insolvency arises. The basis of the funding
requirement varies although typically most are based on an insurer’s premium income.
The commitment of participants to contribute to the fund is not established by contract so there is no insurance
contract. Obligations to guarantee funds are within the scope of IAS 37.
Example 52.11: Right to recover future premiums
Entity A issues an insurance contract which gives it an enforceable and non-cancellable contractual right to
recover all claims paid out of future premiums, with appropriate compensation for the time value of money.
Insurance risk is insignificant because all claims can be recovered from future premiums and consequently
the insurer cannot suffer a significant loss. Therefore the contract is a financial instrument within the scope
of IFRS 9.
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Example 52.12: Market value adjustment without death or maturity benefits
A contract permits the issuer to deduct an MVA from surrender payments to reflect current market prices for
the underlying assets. The contract does not permit a MVA for death and maturity benefits. The amount
payable on death or maturity is the amount originally invested plus interest.
The policyholder obtains an additional benefit because no MVA is applied on death or maturity. However,
that benefit does not transfer insurance risk from the policyholder because it is certain that the policyholder
will live or die and the amount payable on death or maturity is adjusted for the time value of money.
Therefore, the contract is an investment contract because there is no significant insurance risk. This contract
combines the two features discussed in Examples 56.7 and 56.8 at 3.7.1 above. When considered separately,
these two features transfer insurance risk. However, when combined, they do not transfer insurance risk.
Therefore, it is not appropriate to separate this contract into two insurance components. [IFRS 17.9].
If the amount payable on death were not adjusted in full for the time value of money, or were adjusted in
some other way, the contract might transfer significant insurance risk.
4
SEPARATING COMPONENTS FROM AN INSURANCE
CONTRACT
Insurance contracts may contain one or more components that would be within the
scope of another IFRS if they were separate contracts. Such components may be
embedded derivatives, distinct investment components or promises to provide distinct
goods and non-insurance services.
IFRS 17 requires an insurer to identify and separate distinct components in certain
circumstances. When separated, those components must be accounted for under the
relevant IFRS instead of under IFRS 17. [IFRS 17.10]. The IASB considers that accounting
for such components separately using other applicable IFRSs makes them more
comparable to similar contracts that are issued as separate contracts, and allows users
of financial statements to better compare the risks undertaken by entities in different
business or industries. [IFRS 17.BC99].
Therefore, an insurer should:
• apply IFRS 9 to determine whether there is an embedded derivative to be
bifurcated (i.e. be separated) and, if there is, how to account for that separate
derivative (see 4.1 below);
• separate from a host insurance contract an investment component if, and only if,
that investment component is distinct and apply IFRS 9 to the account for the
separated distinct component (see 4.2 below); [IFRS 17.11] and then
• separate from the host insurance contract any promise to transfer distinct good and
services to a policyholder applying IFRS 15 (see 4.3 below). [IFRS 17.12].
After separating the distinct components described above, an entity should apply
IFRS 17 to all remaining components of the host insurance contract. [IFRS 17.13]. The
recognition and measurement criteria of IFRS 17 are discussed at 6 below.
Insurance contracts (IFRS 17) 4455
This is illustrated by the following decision tree:
Is there significant insurance risk in the contract
or is the contract an investment contract with DPF?
Yes
No
Insurance or DPF
Account for under
features present in
IFRS 9
contract
if investment contract
Does contract contain
Account for separated
separable embedded
Yes
embedded derivatives
derivatives?
under IFRS 9
No
Does contract contain
Account for separated
distinct investment
Yes
investment component(s)
component(s)?
under IFRS 9
No
Does contract contain
Account for separated
promise to provide
distinct goods and non-
Yes
distinct good and non-
insurance services under
insurance services?
IFRS 15
No
Apply IFRS 17 to all
remaining components of
insurance contract
4.1
Separating embedded derivatives from an insurance contract
IFRS 17 requires an entity to apply IFRS 9 to determine whether to account separately
for some derivatives embedded in hybrid contracts.
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IFRS 9 requires that an embedded derivative should be separated from its host contract
and accounted for as a derivative if, and only if:
• its economic characteristics and risks are not closely related to the economic
characteristics and risks of the host contract;
• a separate instrument with the same terms would meet the definition of a
derivative; and
• the hybrid contract is not measured at fair value with changes in fair value
recognised in profit or loss (i.e. a derivative that is embedded in a
financial liability
at fair value through profit or loss is not separated). [IFRS 9.4.3.3].
A derivative embedded in an insurance contract is considered to be closely related to
the host insurance contract if the embedded derivative and host insurance contract are
so interdependent that an entity cannot measure the embedded derivative separately
(i.e. without considering the host contract). [IFRS 9.B4.3.8(h)].
The diagram below illustrates the embedded derivative decision tree.
Separation criteria
1.
Is the embedded feature a derivative?
2.
Is the embedded feature not closely related to host?
3.
Is host (hybrid) contact not measured at FVPL?
No (to at least one)
Yes (to all three)
Separation not permitted
Separate embedded feature
The Board believes that accounting separately for some embedded derivatives in
insurance contracts: [IFRS 17.BC104]
• ensures that contractual rights and obligations that create similar risk exposures are
treated alike whether or not they are embedded in a non-derivative host contract; and
• counters the possibility that entities might seek to avoid the requirement to measure
derivatives at fair value by embedding a derivative in a non-derivative host contract.
IFRS 4 had previously required IAS 39 to be applied to derivatives embedded in a host
insurance contract unless the embedded derivative was itself an insurance contract.
[IFRS 4.7]. By applying IFRS 9 to determine whether an embedded derivative needs to be
separated, the Board replaced this option of separating an embedded derivative that was
an insurance contract with a prohibition from separating such closely related embedded
derivatives from the host contract. This is because the Board concluded that when
embedded derivatives are closely related to the host insurance contract, the benefits of
separating those embedded derivatives fail to outweigh the costs (and, under IFRS 17
such embedded derivatives are measured using current market-consistent information).
[IFRS 17.BC105(a)]. In practice, this change is unlikely to have a measurement impact
because any separated insurance component would also be measured under IFRS 17.
IFRS 17 has also removed the exception in IFRS 4 which allowed an insurer not to
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