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TMI BlogInd AS 104 (Insurance Contracts)X X X X Extracts X X X X X X X X Extracts X X X X ..... that it issues with a discretionary participation feature (see paragraph 35). Ind AS 107, Financial Instruments: Disclosures, requires disclosure about financial instruments, including financial instruments that contain such features. 3 This Ind AS does not address other aspects of accounting by insurers, such as accounting for financial assets held by insurers and financial liabilities issued by insurers (see Ind AS 32, Financial Instruments: Presentation, Ind AS 107 and Ind AS 109, Financial Instruments). 4 An entity shall not apply this Ind AS to: (a) product warranties issued directly by a manufacturer, dealer or retailer (see Ind AS 115, Revenue from Contracts with Customers and Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets). (b) employers assets and liabilities under employee benefit plans (see Ind AS 19, Employee Benefits, and Ind AS 102, Share-based Payment) and retirement benefit obligations reported by defined benefit retirement plans. (c) contractual rights or contractual obligations that are contingent on the future use of, or right t o use, a non-financial item (for example, some licence fees, royalties, variable lease payments and similar items) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level). 9 Paragraph 8 applies equally to options to surrender a financial instrument containing a discretionary participation feature. Unbundling of deposit components 10 Some insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components: (a) unbundling is required if both the following conditions are met: (i) the insurer can measure the deposit component (including any embedded surrender options) separately (ie without considering the insurance component). (ii) the insurer s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component. (b) unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations. (c) unbundling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess at the end of each reporting period whether its recognised insurance liabilities are adequate, using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities (less related deferred acquisition costs and related intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognised in profit or loss. 16 If an insurer applies a liability adequacy test that meets specified minimum requirements, this Ind AS imposes no further requirements. The minimum requirements are the following: (a) The test considers current estimates of all contractual cash flows, and of related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees. (b) If the test shows that the liability is inadequate, the entire deficiency is recognised in profit or loss. 17 If an insurer s accounting policies do not require a liability adequacy test that meets the minimum requirements of paragraph 16, the insurer shall: (a) determine the carrying amount of the relevant insura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o changes made by an insurer that already applies Ind ASs and to changes made by an insurer adopting Ind ASs for the first time. 22 An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in Ind AS 8. 23 To justify changing its accounting policies for insurance contracts, an insurer shall show that the change brings its financial statements closer to meeting the criteria in Ind AS 8, but the change need not achieve full compliance with those criteria. The following specific issues are discussed below: (a) current interest rates (paragraph 24); (b) continuation of existing practices (paragraph 25); (c) prudence (paragraph 26); (d) future investment margins (paragraphs 27 29); and (e) shadow accounting (paragraph 30). Current market interest rates 24 An insurer is permitted, but not required, to change its accounting policies so that it remeasures designated insurance liabilities [In this paragraph, insurance liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement of insurance contracts, unless those margins affect the contractual payments. Two examples of accounting policies that reflect those margins are: (a) using a discount rate that reflects the estimated return on the insurer s assets; or (b) projecting the returns on those assets at an estimated rate of return, discounting those projected returns at a different rate and including the result in the measurement of the liability. 28 An insurer may overcome the rebuttable presumption described in paragraph 27 if, and only if, the other components of a change in accounting policies increase the relevance and reliability of its financial statements sufficiently to outweigh the decrease in relevance and reliability caused by the inclusion of future investment margins. For example, suppose that an insurer s existing accounting policies for insurance contracts involve excessively prudent assumptions set at inception and a discount rate prescribed by a regulator without direct reference to market conditions, and ignore some embedded options and guarantees. The insurer might make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not required, to use an expanded presentation that splits the fair value of acquired insurance contracts into two components: (a) a liability measured in accordance with the insurer s accounting policies for insurance contracts that it issues; and (b) an intangible asset, representing the difference between (i) the fair value of the contractual insurance rights acquired and insurance obligations assumed and (ii) the amount described in (a). The subsequent measurement of this asset shall be consistent with the measurement of the related insurance liability. 32 An insurer acquiring a portfolio of insurance contracts may use the expanded presentation described in paragraph 31. 33 The intangible assets described in paragraphs 31 and 32 are excluded from the scope of Ind AS 38 and Ind AS 36, Impairment of Assets . However, Ind AS 38 and Ind AS 36 apply to customer lists and customer relationships reflecting the expectation of future contracts that are not part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer. Discretionary participation features Discretionary participation features in insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticipation feature as a liability, it shall apply the liability adequacy test in paragraphs 15 19 to the whole contract (ie both the guaranteed element and the discretionary participation feature). The issuer need not determine the amount that would result from applying Ind AS 109 to the guaranteed element. (b) if the issuer classifies part or all of that feature as a separate component of equity, the liability recognised for the whole contract shall not be less than the amount that would result from applying Ind AS 109 to the guaranteed element. That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 9 exempts that option from measurement at fair value. The issuer need not disclose the amount that would result from applying Ind AS 109 to the guaranteed element, nor need it present that amount separately. Furthermore, the issuer need not determine that amount if the total liability recognised is clearly higher. (c) although these contracts are financial instruments, the issuer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itivity to insurance risk (see paragraph 39A). (ii) concentrations of insurance risk, including a description of how management determines concentrations and a description of the shared characteristic that identifies each concentration (eg type of insured event, geographical area, or currency). (iii) actual claims compared with previous estimates (ie claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. An insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year. (d) information about credit risk, liquidity risk and market risk that paragraphs 31 42 of Ind AS 107 would require if the insurance contracts were within the scope of Ind AS 107. However: (i) an insurer need not provide the maturity analysis required by paragraph 39(a) and (b) of Ind AS 107 if it discloses information about the estimated timing of the net cash outflows resulting from recognised insurance liabilities in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract that is not a reinsurance contract . discretionary participation feature A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: (a) that are likely to be a significant portion of the total contractual benefits; (b) whose amount or timing is contractually at the discretion of the issuer; and (c) that are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or (iii) the profit or loss of the company, fund or other entity that issues the contract. fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113.) financial guarantee contract A contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. financial risk The risk of a possible future change in one or more of a speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x gives guidance on the definition of an insurance contract in Appendix A. It addresses the following issues: (a) the term uncertain future event (paragraphs B2 B4); (b) payments in kind (paragraphs B5 B7); (c) insurance risk and other risks (paragraphs B8 B17); (d) examples of insurance contracts (paragraphs B18 B21); (e) significant insurance risk (paragraphs B22 B28); and (f) changes in the level of insurance risk (paragraphs B29 and B30). Uncertain future event B2 Uncertainty (or risk) is the essence of an insurance contract. Accordingly, at least one of the following is uncertain at the inception of an insurance contract: (a) whether an insured event will occur; (b) when it will occur; or (c) how much the insurer will need to pay if it occurs. B3 In some insurance contracts, the insured event is the discovery of a loss during the term of the contract, even if the loss arises from an event that occurred before the inception of the contract. In other insurance contracts, the insured event is an event that occurs during the term of the contract, even if the resulting loss is discovered after the end of the contract term. B4 Some insurance contracts cover events that have already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contractual obligation to provide services exceeds the revenue received in advance. To do this, it applies the liability adequacy test described in paragraphs 15 19 of this Ind AS. If this Accounting Standard did not apply to these contracts, the service provider would apply Ind AS 37 to determine whether the contracts are onerous. (d) For these contracts, the disclosure requirements in this Ind AS are unlikely to add significantly to disclosures required by other Ind ASs. Distinction between insurance risk and other risks B8 The definition of an insurance contract refers to insurance risk, which this Ind AS defines as risk, other than financial risk , transferred from the holder of a contract to the issuer. A contract that exposes the issuer to financial risk without significant insurance risk is not an insurance contract. B9 The definition of financial risk in Appendix A includes a list of financial and non-financial variables. That list includes non-financial variables that are not specific to a party to the contract, such as an index of earthquake losses in a particular region or an index of temperatures in a particular city. It excludes non-financial variables that are specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a damaged old asset by a new asset. Similarly, the definition does not limit payment under a term life insurance contract to the financial loss suffered by the deceased s dependants, nor does it preclude the payment of predetermined amounts to quantify the loss caused by death or an accident. B14 Some contracts require a payment if a specified uncertain event occurs, but do not require an adverse effect on the policyholder as a precondition for payment. Such a contract is not an insurance contract even if the holder uses the contract to mitigate an underlying risk exposure. For example, if the holder uses a derivative to hedge an underlying non-financial variable that is correlated with cash flows from an asset of the entity, the derivative is not an insurance contract because payment is not conditional on whether the holder is adversely affected by a reduction in the cash flows from the asset. Conversely, the definition of an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment. This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity bonds, performance bonds and bid bonds (ie contracts that provide compensation if another party fails to perform a contractual obligation, for example an obligation to construct a building). (g) credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. These contracts could have various legal forms, such as that of a guarantee, some types of letter of credit, a credit derivative default contract or an insurance contract. However, although these contracts meet the definition of an insurance contract, they also meet the definition of a financial guarantee contract in Ind AS 109 and ar e within the scope of Ind AS 107 and Ind AS 109, not this Ind AS (see paragraph 4(d)). Nevertheless, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either Ind AS 107 and Ind AS 109 or this Ind AS to such financial guarantee contracts. (h) product warranties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 death or an accident (see also paragraph B13). (e) derivatives that expose one party to financial risk but not insurance risk, because they require that party to make payment based solely on changes in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (see Ind AS 109). (f) a credit-related guarantee (or letter of credit, credit derivative default contract or credit insurance contract) that requires payments even if the holder has not incurred a loss on the failure of the debtor to make payments when due (see Ind AS 109). (g) contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract (commonly described as weather derivatives). (h) catas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the insurer can no longer perform investment management services and collect a fee for doing so. However, this economic loss for the insurer does not reflect insurance risk, just as a mutual fund manager does not take on insurance risk in relation to the possible death of the client. Therefore, the potential loss of future investment management fees is not relevant in assessing how much insurance risk is transferred by a contract. (b) waiver on death of charges that would be made on cancellation or surrender. Because the contract brought those charges into existence, the waiver of these charges does not compensate the policyholder for a pre-existing risk. Hence, they are not relevant in assessing how much insurance risk is transferred by a contract. (c) a payment conditional on an event that does not cause a significant loss to the holder of the contract. For example, consider a contract that requires the issuer to pay one million rupees if an asset suffers physical damage causing an insignificant economic loss of one rupee to the holder. In this contract, the holder transfers to the insurer the insignificant risk of losing one rupee. At the same time, the contract creates non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no overall loss on the whole book of contracts. B28 If an insurance contract is unbundled into a deposit component and an insurance component, the significance of insurance risk transfer is assessed by reference to the insurance component. The significance of insurance risk transferred by an embedded derivative is assessed by reference to the embedded derivative. Changes in the level of insurance risk B29 Some contracts do not transfer any insurance risk to the issuer at inception, although they do transfer insurance risk at a later time. For example, consider a contract that provides a specified investment return and includes an option for the policyholder to use the proceeds of the investment on maturity to buy a life-contingent annuity at the current annuity rates charged by the insurer to other new annuitants when the policyholder exercises the option. The contract transfers no insurance risk to the issuer until the option is exercised, because the insurer remains free to price the annuity on a basis that reflects the insurance risk transferred to the insurer at that time. However, if the contract specifies the annuity rates (or a basis for setting the annuity rates), the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n IFRS 4. Since temporary optional exemptions have not been provided under Ind AS 104, these paragraphs have not been included inInd AS 104. However, paragraph numbers have been retained in Ind AS 104 to maintain consistency with IFRS 4. Amendments to Interest Rate Benchmark Reform Phase 2 added paragraphs 20R-20S in IFRS 4 which prescribes that an insurer applying the temporary exemption from IFRS 9 shall read certain paragraph references of IAS 39 in place of paragraph references of IFRS 9. Since temporary optional exemptions have not been provided under Ind AS 104, these paragraphs have not been included in Ind AS 104. However, paragraph numbers have been retained in Ind AS 104 to maintain consistency with IFRS 4. 4 Paragraph 39(b) has been deleted in IFRS 4 by IASB. However, paragraph number has been retained in Ind AS 104 to maintain consistency with IFRS 4. 5 Paragraphs 40-41F, and 41H, and 42-51 related to effective date and transition have not been included in Ind AS 104 as these are not relevant in Indian context. However, in order to maintain consistency with paragraph numbers of IFRS 4, these paragraph numbers are retained in Ind AS 104. ] ------ * Refer Appendix 1 ***** ..... X X X X Extracts X X X X X X X X Extracts X X X X
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