IFRS 4 — Insurance Contracts

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Overview

IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including
reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of
the IASB's comprehensive project on insurance contracts, the standard provides a temporary
exemption from the requirements of some other IFRSs, including the requirement to
consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when
selecting accounting policies for insurance contracts.
IFRS 4 was issued in March 2004 and applies to annual periods beginning on or after 1 January
2005. IFRS 4 will be replaced by IFRS 17 as of 1 January 2023.

History of IFRS 4

Date Development Comments

1 April 2001 Comprehensive insurance History of the comprehensive project

contracts project carried over
from IASC to new IASB

May 2002 Short-term insurance History of the short-term project

contracts project split off
from comprehensive project

31 July 2003 Exposure Draft ED Comment deadline 31 October 2003

5 Insurance
Contracts published

31 March 2004 IFRS 4 Insurance Effective for annual periods beginning on

Contracts issued or after 1 January 2005

18 August 2005 Amended by Financial Effective for annual periods beginning on

Guarantee Contracts or after 1 January 2006
(Amendments to IAS 39 and
IFRS 4)

12 September Amended by Applying IFRS An entity choosing to apply the overlay

2016 9 'Financial Instruments' with approach retrospectively to qualifying
IFRS 4 'Insurance Contracts' financial assets does so when it first
applies IFRS 9. An entity choosing to
apply the deferral approach does so for
annual periods beginning on or after 1
January 2018.
 18 May 2017 IFRS 17 Insurance Contracts IFRS 17 will replace IFRS 4 as of 1
issued January 2021 2023

25 June 2020 Amendments to IFRS The effective date of IFRS 17, which will
17 and Extension of the be replacing IFRS 4, is now 1 January
Temporary Exemption from 2023; the fixed expiry date for the
Applying IFRS 9 (Amend- temporary exemption in IFRS 4 from
ments to IFRS 4) issued applying IFRS 9 has been deferred to 1
January 2023.

27 August 2020 Amended by Interest Rate The amendments require insurers who
Benchmark Reform — Phase apply the temporary exemption from IFRS
2 (Amendments to IFRS 9, 9 to apply the amendments in IFRS 9 in
IAS 39, IFRS 7, IFRS 4 and accounting for modifications directly
IFRS 16) required by the IBOR reform, they are
effective for annual periods beginning on
or after 1 January 2021

Related Interpretations
o None

Amendments under consideration by IASB

o None

Summary of IFRS 4

Background
IFRS 4 is the first guidance from the IASB on accounting for insurance contracts – but not the
last. A comprehensive project on insurance contracts is under way. The Board issued IFRS 4
because it saw an urgent need for improved disclosures for insurance contracts, and some im-
provements to recognition and measurement practices, in time for the adoption of IFRS by listed
companies throughout Europe and elsewhere in 2005.
Scope
IFRS 4 applies to virtually all insurance contracts (including reinsurance contracts) that an entity
issues and to reinsurance contracts that it holds. [IFRS 4.2] It does not apply to other assets
and liabilities of an insurer, such as financial assets and financial liabilities within the scope
of IAS 39 Financial Instruments: Recognition and Measurement. [IFRS 4.3] Furthermore, it does
not address accounting by policyholders. [IFRS 4.4(f)]
In 2005, the IASB amended the scope of IAS 39 to include financial guarantee contracts issued.
However, 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 IAS 39 or IFRS 4 to such financial guarantee
contracts. [IFRS 4.4(d)]
Definition of insurance contract
An insurance contract is 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 affects the policyholder."
[IFRS [Link] A]
Accounting policies
The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project)
from some requirements of other IFRSs, including the requirement to consider IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors in selecting accounting
policies for insurance contracts. However, the standard: [IFRS 4.14]
o prohibits provisions for possible claims under contracts that are not in existence at the
reporting date (such as catastrophe and equalisation provisions)
o requires a test for the adequacy of recognised insurance liabilities and an impairment test
for reinsurance assets
o requires an insurer to keep insurance liabilities in its balance sheet until they are dis-
charged or cancelled, or expire, and prohibits offsetting insurance liabilities against
related reinsurance assets and income or expense from reinsurance contracts against
the expense or income from the related insurance contract.
Changes in accounting policies
IFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a
result, its financial statements present information that is more relevant and no less reliable, or
more reliable and no less relevant. [IFRS 4.22] In particular, an insurer cannot introduce any of
the following practices, although it may continue using accounting policies that involve them:
[IFRS 4.25]
o measuring insurance liabilities on an undiscounted basis
o measuring contractual rights to future investment management fees at an amount that
exceeds their fair value as implied by a comparison with current market-based fees for
similar services
o using non-uniform accounting policies for the insurance liabilities of subsidiaries.

Remeasuring insurance liabilities

The IFRS permits the introduction of an accounting policy that involves remeasuring designated
insurance liabilities consistently in each period to reflect current market interest rates (and, if the
insurer so elects, other current estimates and assumptions). Without this permission, an insurer
would have been required to apply the change in accounting policies consistently to all similar li-
abilities. [IFRS 4.24]
Prudence
An insurer need not change its accounting policies for insurance contracts to eliminate
excessive prudence. However, if an insurer already measures its insurance contracts with suffi-
cient prudence, it should not introduce additional prudence. [IFRS 4.26]
Future investment margins
There is a rebuttable presumption that an insurer's financial statements will become less
relevant and reliable if it introduces an accounting policy that reflects future investment margins
in the measurement of insurance contracts. [IFRS 4.27]
Asset classifications
When an insurer changes its accounting policies for insurance liabilities, it may reclassify some
or all financial assets as 'at fair value through profit or loss'. [IFRS 4.45]
Other issues
The standard:
o clarifies that an insurer need not account for an embedded derivative separately at fair
value if the embedded derivative meets the definition of an insurance contract [IFRS 4.7-
8]
o requires an insurer to unbundle (that is, to account separately for) deposit components of
some insurance contracts, to avoid the omission of assets and liabilities from its balance
sheet [IFRS 4.10]
o clarifies the applicability of the practice sometimes known as 'shadow accounting' [IFRS
4.30]
o permits an expanded presentation for insurance contracts acquired in a business combi-
nation or portfolio transfer [IFRS 4.31-33]
o addresses limited aspects of discretionary participation features contained in insurance
contracts or financial instruments. [IFRS 4.34-35]

Disclosures
The standard requires disclosure of:
o information that helps users understand the amounts in the insurer's financial statements
that arise from insurance contracts: [IFRS 4.36-37]
 o accounting policies for insurance contracts and related assets, liabilities,
income, and expense
o the recognised assets, liabilities, income, expense, and cash flows arising from
insurance contracts
o if the insurer is a cedant, certain additional disclosures are required

o information about the assumptions that have the greatest effect on the mea-
surement of assets, liabilities, income, and expense including, if practicable,
quantified disclosure of those assumptions
o the effect of changes in assumptions

o reconciliations of changes in insurance liabilities, reinsurance assets, and, if

any, related deferred acquisition costs
o Information that helps users to evaluate the nature and extent of risks arising from
insurance contracts: [IFRS 4.38-39]
o risk management objectives and policies

o those terms and conditions of insurance contracts that have a material effect
on the amount, timing, and uncertainty of the insurer's future cash flows
o information about insurance risk (both before and after risk mitigation by rein-
surance), including information about:
o the sensitivity to insurance risk
o concentrations of insurance risk
o actual claims compared with previous estimates
o the 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
o information about exposures to market risk arising from embedded derivatives
contained in a host insurance contract if the insurer is not required to, and
does not, measure the embedded derivatives at fair value.

Interaction with IFRS 9

On 12 September 2016, the IASB issued amendments to IFRS 4 providing two options for
entities that issue insurance contracts within the scope of IFRS 4:
 o an option that permits entities to reclassify, from profit or loss to other comprehensive
income, some of the income or expenses arising from designated financial assets; this is
the so-called overlay approach;
o an optional temporary exemption from applying IFRS 9 for entities whose predominant
activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral
approach.
An entity choosing to apply the overlay approach retrospectively to qualifying financial assets
does so when it first applies IFRS 9. An entity choosing to apply the deferral approach does so
for annual periods beginning on or after 1 January 2018. The application of both approaches is
optional and an entity is permitted to stop applying them before the new insurance contracts
standard is applied.
On 25 June 2020, the IASB issued Extension of the Temporary Exemption from Applying IFRS
9 (Amendments to IFRS 4) thereby deferring the fixed expiry date for the temporary exemption
in IFRS 4 from applying IFRS 9 to 1 January 2023.

Rating agency analysis of IFRS 4

Fitch Ratings – a leading global fixed income rating agency – has analysed the implications of
IFRS 4 Insurance Contracts and has concluded that Fitch "does not expect any rating actions
as a direct result of the move to IFRS. However, Fitch cannot rule out the possibility that the ad-
ditional disclosure and information contained in the accounts could lead to rating changes due
to an improved perception of risk based on the enhanced information available." The special
report Mind the GAAP: Fitch's View on Insurance IFRS provides an overview of IFRS 4 and the
issues being addressed in Phase II of the IASB's insurance project; assesses the implications
including increased volatility, greater use of discounting and fair values, changes to income
recognition, and enhanced disclosures; and discusses how the changes affect ratings analysis.
An excerpt:

Fitch welcomes the progress made by the IASB towards standards that will be more transparent and
comparable across regions. The agency recognises the significant limitations of phase 1 but believes
that the enhanced disclosure and greater consistency at phase 1 of the insurance accounting project
(set out in IFRS 4) will aid in the analysis of insurers and is a useful stepping stone to the more
valuable phase 2.

We are grateful to Fitch Ratings for allowing us to post their copyrighted report: Click to
Download (PDF 209k).

Quick links
 IFRS 4 — Items not added to the agenda
  IFRS 17 'Insurance Contracts'
 Insurance contracts — Comprehensive project

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