2. AGENDA
 Introduction and Overview
 Definition of an Insurance Contract
 Accounting for Insurance Contracts
 Financial Components and investment contracts
 Disclosures

3. 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

4. OVERVIEW OF IASB & FASB JOINT INSURANCE PROJECT
Phase I
 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.

5. OVERVIEW OF IASB & FASB INSURANCE PROJECT(CONT’D)
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
 DP Preliminary view on insurance contracts published in May 2007
 ED expected in near future

6. 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

7. OVERVIEW OF IFRS 4 (CONT’D)
 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

8. INSURANCE CONTRACTS – 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

9. DEFINITION OF INSURANCE CONTRACTS
 The definition of IFRS 4 refers to some traditional features of insurance
contracts, distinguishing them from financial instruments.
 IFRS 4 definition:
“ 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 affect the policyholder”

10. INSURANCE RISK VS FINANCIAL RISK
INSURANCE RISK FINANCIAL RISK
 Risk, other than financial risk,
transferred from the holder of
a contract to the issuer.
 Risk of a potential future change in one
or more of:
 Interest rate
 Security price
 Commodity price
 Foreign exchange risk
 Index of prices or rates
 Credit rating
 Credit index
 Other variables, such as a non-financial
variable, that is not specific to a party to
the contract
Some insurance contracts expose the issuer to both insurance risk and financial risk. If insurance risk is
significant, such contracts are insurance contracts.

11. SIGNIFICANT INSURANCE RISK
 Insurance risk is significant if, and only if, an insured even could cause
an insurer to
 Pay significant additional benefits
 In any scenario
 Excluding scenarios that lack commercial substance
 The condition may be met even if the insured event is extremely unlikely
or even if the expected (i.e. probability weighted) present value of
contingent cash flows is a small portion of expected present value of
contractual cash flows
 „Additional benefits‟ are amounts in excess of those that would be
payable if no insured event occurred

12. SIGNIFICANT INSURANCE RISK (CONT’D)
 Significance of insurance risk is to be assessed on a contract by
contract basis
 If a relatively homogenous book of small contracts is known to consist
of contracts that all transfer insurance risk, an insurer need not
examine each contract within that book to identify a few non –
derivative contracts that transfer insignificant insurance risk

13. UNCERTAIN FUTURE EVENTS
 Uncertainty (or risk) is the essence of an insurance contract
 At least one of the following should be uncertain at the inception of an
insurance contract
 Whether an insured event will occur
 When it will occur
 How much the insurer will need to pay if it occurs

14. CASE STUDY 1
 Saving contract – investor pays in stream of money which insurer
invests in bonds
 At the end of the fixed term contract, investor receives amount paid to
insurer plus interest linked to the return on bonds
 Contract contains a clause that if the investor dies during the term of
contract, 110% of balance outstanding ( principal + interest accrued)
would be paid out of the investor‟s beneficiary

15. CASE STUDY 2
 Unit – linked savings contract containing guaranteed minimum death or
survival benefits.
 Benefit payable either upon the death of policy holder or upon maturity
of the contract, if the guaranteed minimum benefit is higher than the
unit value at the time a claim is made
 If the contract is surrendered, then the policy holder receives cash for
the value of the units surrendered (less surrender penalties)

16. ACCOUNTING OF INSURANCE CONTRACTS
Temporary exemption from the IAS 8 hierarchy
 IFRS 4 exempts an insurer from applying IAS 8 hierarchy (Para 10-
12) for developing accounting policies for insurance contracts
 The implication of this temporary exemption is that accounting
policies for insurance contracts are generally retained during phase I,
with some exceptions
 The objective of this exemption in phase I of the insurance project
was to avoid, for insurers transitioning to IFRSs, changes in
accounting for insurance contracts ahead of Phase II of the project

17. LIMITATIONS OF IAS 8 EXEMPTION
 The IAS 8 exemption does not exempt an insurer from some implications of
para 10-12 of IAS 8; specifically an insurer should
 Not recognize as a liability any provisions for possible future claims under
insurance contracts that are not in existence at the end of the reporting
period, such as catastrophe and equalization provisions
 Carry out a liability adequacy test
 Remove an insurance liability from its statement of financial position only
when the obligation specified in the contract is extinguished
 An insurer should
 Not offset
 Reinsurance assets against the related insurance liabilities, or
 Reinsurance income and expenses against expenses or income from the
related insurance contracts
 Consider whether its reinsurance assets are impaired

18. LIABILITY ADEQUACY TEST
 An insurer should assess at the end of each reporting period whether
its recognized insurance liabilities are adequate, using current
estimates of future cash flows under its insurance contracts
 IFRS 4 only specifies minimum requirements for conducting the liability
adequacy test
 The test considers current estimates of all contractual cash flows, and
of related cash flows such as claims handling cost, as well as cash
flows resulting from embedded options and guarantees
 If liability is inadequate, entire deficiency is recognized in profit or loss

19. LIABILITY ADEQUACY TEST (CONT’D)
If existing accounting policies include an
assessment that meets the specified
minimum requirements, no further action
required
If current policy is not sufficient to comply
with IFRS 4, then the carrying amount of
the liability should be tested against the
requirements of IAS 37 and, if necessary
increased ( DR PL, CR liability)
If
not?

20. IMPAIRMENT OF REINSURANCE ASSETS
 A cedant should consider at each reporting date whether its
reinsurance assets are impaired
 A reinsurance asset is impaired if, any only if
 There is a objective evidence, as a result of an event that occurred after
initial recognition of the reinsurance asset, that the cedant may not
receive all amounts due to it under the terms of the contract; and
 That event has a reliably measurable impact on the amounts that the
cedant will receive from the reinsurer

21. CHANGE IN ACCOUNTING POLICIES
 An insurer may change its accounting policies for insurance contracts
if, and only if, the changes make the financial statements
 More relevant for decision making and no less reliable; or
 More reliable and no less relevant
 An insurer judges relevance and reliability using the criteria in IAS 8
 This guidance applies to both changes made by an insurer applying
IFRSs and to changes made by insurers adopting IFRSs for the first time

22. CHANGE IN ACCOUNTING POLICIES ( CONT’D)
 Current market interest rates
 An insurer is permitted, but not required, to change its accounting
policies so that it remeasures designated insurance liabilities to reflect
current market interest rates and recognizes changes in those liabilities
in profit and loss
 Shadow accounting
 An insurer may apply “shadow accounting” to remeasure insurance
liabilities to reflect recognized but unrealized gains and losses on
related financial assets in the same way as realized gain and losses.
 Adjustments to the insurance liabilities are recognized in other
comprehensive income only if the unrealized gains and losses on the
related assets are recognized in other comprehensive income

23. CHANGE IN ACCOUNTING POLICIES ( CONT’D)
 An insurer may continue the following practices, but not introduce
them:
 Measuring insurance liabilities on an undiscounted basis
 Using non – uniform accounting policies for insurance contracts ( and
related deferred acquisition costs and related intangible assets, if any)
of subsidiaries
 Insurer need not change accounting policy to eliminate excessive
prudence but cannot introduce additional prudence if insurance
contracts are already measured with sufficient prudence

24. CHANGE IN ACCOUNTING POLICIES ( CONT’D)
 An insurer is permitted to continue applying and permitted to introduce
following accounting policies
 Using shadow accounting
 Remeasure designated insurance liabilities to reflect current market
interest rates / other assumptions and recognize changes in those
liabilities in profit and loss

25. INSURANCE AND INVESTMENT CONTRACTS
Unbundling of deposit component
 Some insurance contracts contain both an insurance component and
a deposit component. For such contracts
 Unbundling of a deposit component is permitted if
 The deposit component can be measured separately; and
 Insurer’s accounting policies require it to recognize all rights and
obligations arising from the deposit component, regardless of the
basis used to measure those rights and obligations
 Unbundling of a deposit component is required if:
 The deposit component can be measured separately; and
 Insurer’s accounting policies do not otherwise require it to recognize
all rights and obligations arising from the deposit component

26. Unbundling of deposit component ( cont‟d)
 Unbundling of a deposit component is prohibited if:
 An insurer cannot measure the deposit component separately

27. EMBEDDED DERIVATIVES
 A embedded derivative is a component of a hybrid (combined) contract
that includes both the derivative and a host contract
 Components of insurance contracts that meet the definition of a
derivative are within the scope of IAS 39 / IFRS 9 and are therefore
subject to the general requirements for embedded derivatives under IAS
39 / IFRS 9:
 However, there are two exceptions:
 Components that meet the definition of an insurance contract ( e.g.;
components that transfer significant insurance risk); and
 Surrender options with fixed terms

28. EMBEDDED DERIVATIVES (CONT’D)
 As insurance contracts are not within the scope of IFRS 9, the
requirements in that standard to separate embedded derivatives are not
applicable to insurance contracts embedded in a host contract. A
component meeting the definition of an insurance contract does not
need to be separated from its host contract
 For example, an option to take a life-contingent annuity contract would
not be separated from a host insurance contract

29. EMBEDDED DERIVATIVES (CONT’D)
 Surrender option with fixed terms
 A policyholder option to surrender an insurance contract
 For a fixed amount
 Or for an amount based on a fixed amount and an interest rate
 Even if the exercise price differs from the carrying amount of the host
insurance liability
need not be separated from the host insurance contract

30. DISCRETIONARY PARTICIPATION FEATURES
 Definition
 A contractual right to receive, as a supplement to guaranteed benefits,
additional benefits
 That are likely to be a significant portion of the total contractual
benefits;
 Whose amounts or timing is contractually at the discretion of the issuer;
and
 That are contractually based on, the performance of a specified pool of
contracts, or investment returns on a specified pool of assets owned by
the issuer, or the profit or loss of the issuer of the contract
 IFRS 4 addresses limited aspects of DPFs contained in insurance
contracts or in financial instruments

31. DISCLOSURES
 Disclosures comprise
 Explanation of recognized amounts
 Nature and extent of risks arising from insurance contracts
 Explanation of recognized amounts
 Accounting policies for insurance contracts and related assets, liabilities,
income and expense
 Amounts of recognized assets, liabilities, income and expense arising from
insurance contracts, as well as gains/ losses recognized on reinsurance by
the cedant
 How the most significant assumptions used to measure recognized amounts
are determined, and if practicable, quantified disclosure of assumptions
 Effect of changes in assumptions used to measure insurance assets and
liabilities

32. DISCLOSURES (CONT’D)
 Nature and extent of risks
 Risk management objectives, policies and processes, and method used
for managing risk from insurance contracts
 Sensitivity of insurance risk
 Concentrations of insurance risk
 Actual claims compared with previous estimates, i.e. claims
development
 Information about credit risk, liquidity risk and market risk that IFRS 7
would require if the insurance contracts were within the scope of IFRS
7, with certain exceptions