IFRS 17 – Identifying the insurance contract | KPMG | GLOBAL
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Identifying the insurance contract

Identifying the insurance contract

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Key observation

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The contract is the lowest unit of account used under IFRS 17. In some circumstances, the legal form of a contract does not reflect the substance of its contractual rights and obligations. In these cases, separation of the contract is appropriate.

Separating insurance components of a single contract

February 2018 TRG meeting

What's the issue?

Insurers may combine different types of insurance products, or coverages that have different insurance risks, into one legal insurance contract.

For example, an insurer may provide fire cover for a policyholder’s house and automobile cover for their car under a single contract. Insurers may also hold one legal reinsurance contract to reinsure multiple underlying contracts that may be included in different groups of contracts.

This raises the question of whether IFRS 17 permits different insurance components of a single legal contract to be separated for measurement purposes.


What did the TRG discuss? 

TRG members appeared to agree that, generally, the lowest unit of account used under IFRS 17 is the contract, including all insurance components. Generally, this is consistent with how most insurers design their contracts – i.e. in a way that reflects their substance.

However, the TRG members observed that in some circumstances the legal form of a contract does not reflect the substance of its contractual rights and obligations. In these cases, separating the contract for measurement purposes would be appropriate. The TRG acknowledged that separation of insurance components is not a matter of policy choice, but is an assessment based on judgement considering all relevant facts and circumstances.


What’s the impact?

If an insurer believes that the legal form of some of the contracts that it issues does not reflect the substance of their contractual rights and obligations, then – as noted by the TRG members – it should apply judgement to determine whether it is appropriate to separate a contract into multiple insurance components.

Relevant facts and circumstances to consider may include whether:

  • the insurance components are sold separately;
  • the insurance components can be cancelled or lapsed together; or
  • the substance of the legal contract is the same as issuing separate contracts.

How an entity identifies its contract will impact various aspects of the accounting under IFRS 17, including the measurement of the contract and its insurance service results.

Speak to your usual KPMG contact to discuss how these observations could impact your business.

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.