IFRS 17 – Defining contract boundaries | KPMG | GLOBAL
Contract boundary

Defining contract boundaries

Defining contract boundaries

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Key observation

Map and compass

When assessing which cash flows are within the contract’s boundary, an entity considers its ability to reassess the risks of the contract. The reassessed risks are policyholder risks.

Boundaries of contracts with annual renewable terms

February 2018 TRG meeting

Step-rated yearly renewable term (YRT) contracts and unit-linked contracts with additional insurance benefits contain several features that could impact the accounting under IFRS 17. Contracts, like these, contain all or some of the following.


Contract feature Further details
Annual renewal guarantee The contract is guaranteed renewable every year
Annual premium increases Increases in premiums/insurance fees are set at inception and based on the policyholder’s age
Annual repricing mechanism The insurer can reprice the premium/insurance fee annually, based on the emergence of risks within the portfolio to which the contract belongs – i.e. there is no further underwriting of the individual policyholder

These features raise the question of whether the different cash flows on initial recognition should include expected cash flows that relate to expected renewals after the next annual repricing date – i.e. whether the contract boundary should be greater than one year.


What did the TRG discuss?

TRG members appeared to agree that insurers should only consider the ability to reassess and reprice policyholder risks when determining contract boundaries. They observed that policyholder risks are risks transferred from the policyholder to the insurer. The IASB staff noted that these can include insurance and financial risks but exclude risks that are not transferred from the policyholder to the entity under such contracts – e.g. lapse and expense risk.

TRG members also noted a distinction between repricing based on a reassessment of:

  • portfolio risks based on the emergence of risk within the existing portfolio; and 
  • more general community risks based on the emergence of risk within a broader group of policyholders.

The former was the subject of the types of contracts discussed above and would therefore result in a contract boundary that excludes expected future contract renewals. 


What's the impact?

Management needs to consider all of the terms and conditions when assessing the contract boundary under IFRS 17, including which risks are reassessed and repriced and at what level.

Under IFRS 17, the boundaries of these contracts may be limited to the year for which premiums have been received. 

One possible outcome of having shorter contract boundaries might be that contracts initially written and priced to reflect an entity’s expectation of future renewals are measured in a manner that does not reflect that expectation. This may cause contracts to be considered onerous when they are initially written (e.g. due to significant insurance acquisition cash flows incurred when the contract is initially written) and only profitable if and when they are renewed. This is considered further in Measuring insurance cash flows.

Further details
Further details

About this page

This topic page is part of our Insurance – Transition to IFRS 17 series, which covers the discussions of the IASB's Transition Resource Group (TRG) for Insurance Contracts.

You can also find more insight and analysis on the new insurance contracts standard at kpmg.com/ifrs17.