• IFRS 17 established a principle (to reflect the services provided in a period under a
group of insurance contracts), not detailed requirements, and that it would not be
possible to develop detailed requirements that would apply appropriately to the
wide variety of insurance products existing globally.
• The determination of coverage units is not an accounting policy choice but
involves judgement and estimates to best achieve the principle of reflecting the
services provided in each period. Those judgements and estimates should be
applied systematically and rationally.
• The analysis of the examples in the IASB Staff paper depends on the fact patterns
in that paper, and would not necessarily apply to other fact patterns. In addition,
which method would best reflect the services provided in each period would be a
matter of judgement based on facts and circumstances.
• In considering how to achieve the principle, the TRG members observed:
• the period in which an entity bears insurance risk is not necessarily the same
as the insurance coverage period;
• expectations of lapses of contracts are included in the determination of
coverage units because they affect the expected duration of the coverage.
Consistently, coverage units reflect the likelihood of insured events occurring
to the extent that they affect the expected duration of coverage for contracts
in the group;
• because the objective is to reflect the insurance services provided in each
period, different levels of service across periods should be reflected in the
determination of coverage units;
• determining the quantity of benefits provided under a contract requires an
entity to consider the benefits expected to be received by the policyholder,
not the costs of providing those benefits expected to be incurred by the entity;
• a policyholder benefits from the entity standing ready to meet valid claims, not
just from making a claim if an insured event occurs. The quantity of benefits
provided therefore relates to the amounts that can be claimed by the policyholder;
• different probabilities of an insured event occurring in different periods do
not affect the benefit provided in those periods of the entity standing ready
to meet valid claims for that insured event. Different probabilities of different
4510 Chapter 52
types of insured events occurring might affect the benefit provided by the
entity standing ready to meet valid claims for the different types of insured
events; and
• IFRS 17 does not specify a particular method or methods to determine the
quantity of benefits. Different methods may achieve the objective of reflecting
the services provided in each period, depending on facts and circumstances.
The TRG members considered that the following methods might achieve the objective
if they are reasonable proxies for the services provided under the groups of insurance
contracts in each period:
• a straight-line allocation over the passage of time, but reflecting the number of
contracts in a group;
• a method based on the maximum contractual cover in each period;
• a method based on the amount the entity expects the policyholder to be able to
validly claim in each period if an insured event occurs;
• methods based on premiums. However, premiums will not be reasonable proxies
when comparing services across periods if they are receivable in different periods
to those in which insurance services are provided, or reflect different probabilities
of claims for the same type of insured event in different periods rather than
different levels of service of standing ready to meet claims. Additionally, premiums
will not be reasonable proxies when comparing contracts in a group if the
premiums reflect different levels of profitability in contracts. The level of
profitability in a contract does not affect the services provided by the contract; and
• methods based on expected cash flows. However, methods that result in no
allocation of the contractual service margin to periods in which the entity is
standing ready to meet valid claims do not meet the objective.15
The following examples apply the principles above to specific fact patterns for
insurance contracts issued without direct participation features. Examples for
reinsurance contracts issued and insurance contracts with direct participation features
are discussed at 8.9.3 and 11.2.3 below respectively.16
Example 52.22: Credit life loan insurance
A life insurance policy pays a death benefit equal to the principal and interest outstanding on a loan at the
time of death. The balance of the loan will decline because of contractually scheduled payments and cannot
be increased.
Applying the principles above the method suggested for determining the quantity of benefits is the cover for
the contractual balance outstanding because it is both the maximum contractual cover and the amount the
entity expects the policyholder to be able to make a valid claim for if the insured event occurs.
Example 52.23: Credit life product with variable amount of cover
A credit life insurance policy where the amount payable on an insured event varies (for example, claims might
relate to an outstanding credit card balance). In these cases the sum assured will vary over time, rather than
simply reducing. In addition, the sum assured may be limited based on the lender’s credit limits.
Applying the principles above, the methods suggested for determining the quantity of benefits are either the
constant cover of the contractual maximum amount of the credit limit or cover based on the expected credit
card balances (i.e. the amount the entity expects the policyholder to be able to make a valid claim for if the
insured event occurs).
Insurance contracts (IFRS 17) 4511
Example 52.24: Mortgage loss cover
An insurance contract provides cover for five years for default losses on a mortgage, after recovering the
value of the property on which the mortgage is secured. The balance of the mortgage will decline because of
contractually scheduled payments and cannot be increased.
Applying the principles above, the methods suggested for determining the quantity of benefits are either the
maximum contractual cover (the contractual balance of mortgage) or the amount the entity expects the
policyholder to be able to make a valid claim for if the insured event occurs (the contractual balance of the
mortgage less the expected value of the property).
Example 52.25: Product warranty
A five-year warranty coverage insurance contract provides for replacement of a purchased item if it fails to
work properly within five years of the date of purchase. Claims are typically skewed toward the end of the
coverage period as the purchased item ages.
Applying the principles above, the quantity of benefits are constant over the five year coverage period if the
price of replacement product is expected to remain constant. However, if the cost of the replacement product
rises of the coverage period (e.g. inflation costs) then the coverage units should include expectations about
the cost of replacing the item.
Example 52.26: Extended product warranty
Extended warranty policies co
ver the policyholders after the manufacturer’s original warranty has expired.
The policies provide new for old cover in the event of a major defect to the covered asset.
Applying the principles above, the expected coverage duration does not start until the manufacturer’s original
warranty has expired. The policyholder cannot make a valid claim to the entity until then.
Example 52.27: Health cover
An insurance contract provides health cover for 10 years for specified types of medical costs up to €1m over
the life of the contract, with the expected amount and expected number of claims increasing with age.
Applying the principles above, the expected coverage duration is the 10 years during which cover is provided,
adjusted for any expectations of the limit being reached during the ten years and lapses. For determining the
quantity of benefits the following two methods are suggested:
• comparing the contractual maximum amount that could have been claimed in the period with the
remaining contractual maximum amount that can be claimed as a constant amount for each future
coverage period. So, if a claim of €100,000 were made in the first year, at the end of the year the entity
would compare €1m coverage provided in the year with coverage of €900,000 for the following nine
years, resulting in an allocation of 1/9.1 of the contractual service margin for the first year; or
• comparing the maximum amount that could be claimed in the period with the expected maximum
amounts that could be claimed in each of the future coverage periods, reflecting the expected reduction
in cover because of claims made. This approach involves looking at the probabilities of claims in
different periods to determine the expected maximum amounts in future periods. However, in this fact
pattern, the probability of claims in one period affects the amount of cover for future periods, thereby
affecting the level of service provided in those periods.
Example 52.28: Transaction liability
A transaction liability policy will pay claims for financial losses arising as a result of breaches of
representations and warranties made in a specified and executed acquisition transaction. The policy period
(contract term) is for 10 years from the policy start date. The insurer will pay claims for financial losses
reported during the 10 year policy period up to the maximum sum insured.
Applying the principles above the insured event is the discovery of breaches of representations and warranties
(consistent with the definition of title insurance – see 3.7 above). Coverage starts at the moment the contract
is signed and lasts for 10 years.
4512 Chapter 52
Example 52.29: Combination of different types of cover
This example assumes there are five different contracts (A-E) in a single group of insurance contracts. Each
contract has a different combination of four coverages (accidental death, cancer diagnosis, surgery and
inpatient treatment). Each contract has a different coverage period. Coverages have a high level of
interdependency in the same insurance contract; if a coverage of an insurance contract in the group of
insurance contracts lapses, other coverages of the same insurance contract lapse simultaneously. Presented in
the table below is the summary of the contracts.
Contract Coverage
Coverage
period
Accidental
Cancer
Surgery Inpatient
death
diagnosis
treatment
A
Cover of 2000
Cover of 1000
Cover of 500
Cover of 50
2 years
B
N/A
Cover of 1000
Cover of 500
N/A 5
years
C
N/A
N/A
Cover of 500
Cover of 50
2 years
D
N/A
N/A
Cover of 500
Cover of 50
5 years
E
Cover of 2000
N/A
N/A
N/A 10
years
The entity charges the same annual premium amount for each type of cover, and the total annual premium
amount for a contract is the sum of the premiums for each type of cover included in the contract.
Applying the principles above the expected coverage duration is the period in which cover is provided, adjusted
for expectations of lapses. The quantity of benefits for each contract is the sum of all the levels of cover provided.
So, based on the cover set out in the table, the total coverage units for contract A for each year would be $3,550
(i.e. 2,000 + 1,000 + 500 + 50) and for contract B 1,500 (i.e. 1,000 + 500). Methods which do not reflect the
different amounts of cover provided by each contract would not appear to be valid. A method based on annual
premiums may be valid depending on the factors mentioned in the TRG analysis above.
In this example, in all scenarios the coverage period is the same for all coverage components so the probability
of the insured event does not affect the coverage period and can be ignored. If the coverage period for the
various covers is different, then the probability of the insured event becomes relevant as some coverage
component will expire before other coverage components.
Example 52.30: Life contingent annuity
A life contingent pay out annuity pays a fixed monthly amount of €10 each period until the annuitant dies.
Applying the principles above the expected coverage duration is the probability weighted average expected
duration of the contract. The expected coverage duration is reassessed each period. The quantity of benefits
is the fixed monthly amount of €10. An approach that does not reassess the expected coverage period would
appear to be inconsistent with the current measurement principle of IFRS 17.
Example 52.31: Forward purchase of fixed rate annuity
A forward contract to buy an annuity in the future at a fixed rate. The premium is payable when the annuity
is bought. If the policyholder dies, or cancels the contract, before the date the annuity can be purchased, the
policyholder receives no benefit.
Applying the principles above the entity bears insurance risk from the date the forward contract is issued, but
the coverage period does not start until the date the annuity starts (as a claim cannot be made before that date).
The insured event is that the policyholder lives long enough (i.e. survives) to receive payments under the annuity.
Insurance contracts (IFRS 17) 4513
8.7.2
Do services provided by an insurance contract include investment-
related services?
In May 2018, the TRG analysed an IASB staff paper that contained the IASB staff’s views
on whether the coverage period for insurance contracts with and without direct
participation features should include the period in which investment-related services
are provided. The IASB staff view was that:
• The coverage period for contracts subject to the variable fee approach should
include the period in which investment-related services are provided (see 11.2.3
below). Subsequently, the IASB has tentatively decided to propose a narrow-scope
amendment to IFRS 17 to clarify the definition of the coverage period to make the
Standard clear (see 18 below).
�
�� The coverage period for contracts not subject to the variable fee approach (i.e.
those subject to the general model) should include only the period in which
insurance services are provided (i.e. not any additional period in which
investment-related services are provided). In the IASB staff’s view, there is not a
sufficient link between the amounts promised to policyholders and the returns on
assets for the entity to receive a fee from the policyholder for investment-related
services. Instead, the assets arising from the premiums received are the entity’s
assets that it manages on its own behalf. The amounts promised to policyholders
other than insurance benefits (i.e. the investment components) are not related to
service, but are instead a form of financial instrument. The difference between the
investment income from the entity’s assets and insurance finance expenses is
presented as a finance result.17
The TRG members agreed that IFRS 17 identifies contracts subject to the variable fee
approach as contracts that provide both insurance services and investment-related
services. The consequences of this was that references in IFRS 17 to services, quantity
of benefits and expected coverage duration related to insurance and investment-related
services, benefits and coverage duration (see 11.2.3 below). However, most TRG
members disagreed that insurance contracts under the general model should be treated
as providing only insurance services.18 Some TRG members had significant concerns
about the ‘cliff effect’ caused by the difference in contractual service margin allocation
for contracts eligible for the variable fee approach and other contracts that the TRG
members feel provide a similar mix of investment-related and insurance services, if
allocation of the contractual service margin under the general model can only reflect
the provision of insurance coverage. In our view, this issue is unresolved and it is likely
to be discussed by the IASB at a later date.
8.8
Measurement of onerous contracts
As discussed at 8 above, a loss must be recognised on initial recognition of a group of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 892
