6/5/23, 2:36 PM IFRS 4 — Insurance Contracts

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 con-
tracts 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 (https://www.iasplus.com/en/standards/ias/ias8) 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 contracts project History of the com­pre­hen­sive project
carried over from IASC to new IASB (https://www.iasplus.com/en/projects/major/insurance)
May 2002 Short-term insurance contracts project split off History of the short-term project
from com­pre­hen­sive project (https://www.iasplus.com/en/projects/completed/other/project83)
31 July 2003 Exposure Draft ED 5 Insurance Contracts Comment deadline 31 October 2003
(https://www.iasplus.com/en/news/2003/July/news865) published
31 March 2004 IFRS 4 Insurance Contracts issued Effective for annual periods beginning on or after 1 January
(https://www.iasplus.com/en/news/2004/March/news1518) 2005
18 August 2005 Amended by Financial Guarantee Contracts Effective for annual periods beginning on or after 1 January
(https://www.iasplus.com/en/news/2005/August/news1890)(Amend­ments to IAS 39 and IFRS 4) 2006
12 September 2016 Amended by Applying IFRS 9 'Financial In­- An entity choosing to apply the overlay approach ret­ro­spec­tively
(https://www.iasplus.com/en/news/2016/09/ifrs-9-ifrs-4) stru­ments' with IFRS 4 'Insurance Contracts' 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.
18 May 2017 IFRS 17 IFRS 17 will replace IFRS 4 as of 1 January 2021 2023
(https://www.iasplus.com/en/news/2017/05/ifrs-17) (https://www.iasplus.com/en/standards/ifrs/ifrs-
17) Insurance Contracts issued
25 June 2020 Amend­ments to IFRS 17 and Extension of the The effective date of IFRS 17, which will be replacing IFRS 4, is
(https://www.iasplus.com/en/news/2020/06/ifrs-17) Temporary Exemption from Applying IFRS 9 now 1 January 2023; the fixed expiry date for the temporary
(Amend­ments to IFRS 4) issued exemption in IFRS 4 from applying IFRS 9 has been deferred to
1 January 2023.
27 August 2020 Amended by Interest Rate Benchmark Reform The amend­ments require insurers who apply the temporary
(https://www.iasplus.com/en/news/2020/08/ibor) — Phase 2 (Amend­ments to IFRS 9, IAS 39, exemption from IFRS 9 to apply the amend­ments in IFRS 9 in
IFRS 7, IFRS 4 and IFRS 16) accounting for mod­i­fi­ca­tions directly required by the IBOR
reform, they are effective for annual periods beginning on or
after 1 January 2021
Related In­ter­pre­ta­tions
None

Amend­ments under con­sid­er­a­tion by IASB

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
(https://www.iasplus.com/en/projects/major/insurance) is under way. The Board issued IFRS 4 because it saw an urgent need for improved dis­clo­sures for insurance
contracts, and some im­prove­ments 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
(https://www.iasplus.com/en/standards/ias/ias39) Financial In­stru­ments: Recog­ni­tion and Mea­sure­ment. [IFRS 4.3] Fur­ther­more, it does not address accounting by pol­-
i­cy­hold­ers. [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)]

De­f­in
­ ­it­ ion 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 com­pen­-
sate the pol­i­cy­holder if a specified uncertain future event (the insured event) adversely affects the pol­i­cy­holder." [IFRS 4.​Appendix A]

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6/5/23, 2:36 PM IFRS 4 — Insurance Contracts
Accounting policies

The IFRS exempts an insurer tem­porar­ily (until com­ple­tion of Phase II (https://www.iasplus.com/en/projects/major/insurance) of the Insurance Project) from some re­-
quire­ments of other IFRSs, including the re­quire­ment to consider IAS 8 (https://www.iasplus.com/en/standards/ias/ias8) Accounting Policies, Changes in Accounting
Estimates and Errors in selecting accounting policies for insurance contracts. However, the standard: [IFRS 4.14]
prohibits pro­vi­sions for possible claims under contracts that are not in existence at the reporting date (such as cat­a­stro­phe and equal­i­sa­tion pro­vi­sions)
requires a test for the adequacy of recog­nised insurance li­a­bil­i­ties and an im­pair­ment test for rein­sur­ance assets
requires an insurer to keep insurance li­a­bil­i­ties in its balance sheet until they are dis­charged 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]
measuring insurance li­a­bil­i­ties on an undis­counted basis
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
using non-uni­form accounting policies for the insurance li­a­bil­i­ties of sub­sidiaries.

Re­mea­sur­ing insurance li­a­bil­it­ ies

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 li­a­bil­i­ties. [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 con-
tracts with suf­fi­cient 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 in­-
vest­ment 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:
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]
requires an insurer to unbundle (that is, to account sep­a­rately for) deposit com­po­nents of some insurance contracts, to avoid the omission of assets and li­a­bil­i­-
ties from its balance sheet [IFRS 4.10]
clarifies the ap­plic­a­bil­ity of the practice sometimes known as 'shadow accounting' [IFRS 4.30]
permits an expanded pre­sen­ta­tion for insurance contracts acquired in a business com­bi­na­tion or portfolio transfer [IFRS 4.31-33]
addresses limited aspects of dis­cre­tionary par­tic­i­pa­tion features contained in insurance contracts or financial in­stru­ments. [IFRS 4.34-35]
Dis­clo­sures

The standard requires dis­clo­sure of:

in­for­ma­tion that helps users un­der­stand the amounts in the insurer's financial state­ments that arise from insurance contracts: [IFRS 4.36-37]
accounting policies for insurance contracts and related assets, li­a­bil­i­ties, income, and expense
the recog­nised assets, li­a­bil­i­ties, income, expense, and cash flows arising from insurance contracts
if the insurer is a cedant, certain ad­di­tional dis­clo­sures are required
in­for­ma­tion about the as­sump­tions that have the greatest effect on the mea­sure­ment of assets, li­a­bil­i­ties, income, and expense including, if prac­ti­ca­-
ble, quan­ti­fied dis­clo­sure of those as­sump­tions
the effect of changes in as­sump­tions
rec­on­cil­i­a­tions of changes in insurance li­a­bil­i­ties, rein­sur­ance assets, and, if any, related deferred ac­qui­si­tion costs
In­for­ma­tion that helps users to evaluate the nature and extent of risks arising from insurance contracts: [IFRS 4.38-39]
risk man­age­ment ob­jec­tives and policies
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
in­for­ma­tion about insurance risk (both before and after risk mit­i­ga­tion by rein­sur­ance), including in­for­ma­tion about:
the sen­si­tiv­ity to insurance risk
con­cen­tra­tions of insurance risk

https://www.iasplus.com/en/standards/ifrs/ifrs4 2/3
6/5/23, 2:36 PM IFRS 4 — Insurance Contracts
actual claims compared with previous estimates
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
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 (https://www.iasplus.com/en/news/2016/09/ifrs-9-ifrs-4), the IASB issued amend­ments to IFRS 4 providing two options for entities that issue
insurance contracts within the scope of IFRS 4:
an option that permits entities to re­clas­sify, from profit or loss to other com­pre­hen­sive income, some of the income or expenses arising from des­ig­nated finan-
cial assets; this is the so-called overlay approach;
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 (https://www.iasplus.com/en/news/2020/06/ifrs-17), 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 ad­di­tional 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 (https://www.iasplus.com/en/binary/resource/fitchinsurance.pdf)
(PDF 209k).

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