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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Insurers sometimes simultaneously issue different contracts to the same policyholder. If there are indicators that multiple insurance contracts reflect a single contract in substance, then an insurer should apply judgement to determine whether it is appropriate to combine them.

Combining multiple insurance contracts

May 2018 TRG meeting

What's the issue?

Insurers sometimes simultaneously issue different contracts to the same policyholder. For example, an insurer may issue two contracts – one for home insurance and one for motor insurance – to the same policyholder at the same time, with the policyholder receiving a discount for the whole transaction.

This raises a question as to when it is necessary to treat multiple insurance contracts as a single contract under IFRS 17. 

 

What did the TRG discuss?

TRG members appeared to agree that an insurance arrangement with the legal form of a single contract would generally also be considered to be a single contract in substance. 

IFRS 17 acknowledges that if multiple insurance contracts with the same (or a related) counterparty achieve – or are designed to achieve – an overall commercial effect, then they may reflect a single contract in substance.

TRG members observed that any decision to combine multiple insurance contracts is based on significant judgement considering all relevant facts and circumstances. No single factor is determinative.

They also observed that:

  • if the lapse or maturity of one contract causes the lapse or maturity of another, then this may indicate that the contracts were designed to achieve an overall commercial effect; and
  • the fact that multiple insurance contracts are entered into at the same time with the same counterparty, or the existence of a discount if a policyholder purchases more than one insurance coverage does not necessarily mean that multiple insurance contracts achieve an overall commercial effect.  

It was also noted that allocating any discounts or cross-subsidies between multiple coverages to components proportionately, or on the basis of observable evidence, could better reflect the economics of the separate components.

 

What's the impact?

If there are indicators that multiple insurance contracts reflect a single contract in substance, then an insurer should apply judgement to determine whether it is appropriate to combine them. 

Relevant facts and circumstances to consider may include whether:

  • the rights and obligations under the contracts are different when considered together instead of separately; or
  • the different risks covered by different insurance contracts are interdependent – e.g. when the risk of one contract offsets or reduces that of the other.

The question of whether to combine contracts might be relevant to certain fronting arrangements.

 

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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.

 

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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.

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