The assessment as to whether a contract is an insurance contract can be very complex, especially as the principles for determining whether a contract is an insurance contract in the scope of IFRS 17 may be unfamiliar to those performing the assessment. Advice from specialist advisors may be required. Entities will need to pay attention to the scope of IFRS 17 that includes various exceptions and exemptions that require or allow some contracts that meet the definition of an insurance contract to be accounted for by applying another IFRS Accounting Standard, for example IFRS 15 Revenue from Contracts with Customers.

In this article we will talk about the principles and examples of determining if a contract may or may not fall within the scope of IFRS 17.

Definition of insurance contract

An insurance contract is defined as a contract under which one party (the iissuer) 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.

Thus, there are key aspects of this definition, namely:

• the requirement for a specified uncertain future event;
• the meaning of insurance risk;
• whether insurance risk is significant; and
• whether the insured event adversely affects the policyholder.

The definition of an insurance contract requires the identification of an insured event, which is defined as an uncertain future event that is covered by an insurance contract and creates insurance risk. The element of uncertainty (or risk) is essential for a contract to be considered an insurance contract, and at least one of the following must be uncertain at the inception of an insurance contract:

• whether an insured event will occur;
• when it will occur; or
• how much the insurer will need to pay if it occurs.

The assessment of whether a contract transfers significant insurance risk is critical because some contracts may appear to meet the definition of an insurance contract but they are not considered to be insurance contracts for the purposes of IFRS 17 because the insurance risk transferred is not significant. There is no quantitative guidance in IFRS 17 as to what constitutes significant insurance risk, therefore this is an area that may require significant judgement by entities.

An entity should assess the significance of insurance risk contract by contract on the present value basis and it can only consider scenarios that have commercial substance. IFRS 17 explains that scenarios with no commercial substance are those that have no discernible effect on the economics of the transaction.

However, using one contract as a single unit for the assessment may not be sufficient. Sometimes two or more contracts entered into at the same time with the same or related counterparties need to be combined in order to assess the substance of the transactions as a whole.

On the contrary, an insurance contract may have several elements in addition to the provision of the insurance coverage service, such as an investment component, an investment management service, an embedded derivative and possibly some other goods or services. Some of these elements need to be separated and accounted for by applying other IFRS standards, while other elements remain within the insurance measurement model. In addition, sometimes the elements that remain within the insurance measurement model must be separated into several insurance contracts to reflect the substance of the transactions.

The IFRS 17 standard also covers reinsurance contracts issued and held by the entity. It is important for an entity also to consider if a contract falls under the reinsurance definition, for example when the entity cooperates with an insurance company through the profit-sharing mechanism or otherwise takes aggregated risk from another entity.

Contracts specifically excluded from IFRS 17

An entity shall not apply IFRS 17 to:

• warranties provided by a manufacturer, dealer, or retailer in connection with the sale of its goods or services to a customer.
• employers’ assets and liabilities from employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans.
• contractual rights or contractual obligations contingent on the future use of, or the right to use, a non-financial item (for example, some licence fees, royalties, variable and other contingent lease payments and similar items).
• residual value guarantees provided by a manufacturer, dealer or retailer and a lessee’s residual value guarantees when they are embedded in a lease.
• financial guarantee contracts, unless the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts. The issuer shall choose to apply either IFRS 17 or IAS 32 Financial Instruments: Presentation, IFRS 7 Financial Instruments: Disclosures and IFRS 9 Financial Instruments to such financial guarantee contracts. The issuer may make that choice contract by contract, but the choice for each contract is irrevocable.
• contingent consideration payable or receivable in a business combination.
• insurance contracts in which the entity is the policyholder, unless those contracts are reinsurance contracts held.
• credit card contracts, or similar contracts that provide credit or payment arrangements, which meet the definition of an insurance contract if, and only if, the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer. However, if, and only if, IFRS 9 requires an entity to separate an insurance coverage component that is embedded in such a contract, the entity shall apply IFRS 17 to that component.

IFRS 17 allows entities to apply either IFRS 17 or another IFRS Accounting Standard to the following contracts, which meet the definition of

• fixed service fee contracts that meet all the conditions required by IFRS 17;
• loan contracts that meet the definition of an insurance contract but limit the compensation for insured events to the amount otherwise required to settle the policyholder’s obligation created by the contract;
• financial guarantee contracts, if the entity has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts.

Examples of the insurance contracts, issued by non-insurance companies

As explained above, assessment if the contract should be recognised using IFRS 17 is being done on a contract-by-contract basis. This is especially important when assessing some complex contracts that may or may not / entirely or partially fall under the IFRS 17 scope.

In particular, here are the examples of contracts which may fall under the IFRS 17 scope:

• Contracts with performance guarantee features (for their issuers), if the company is not obliged to pay compensation in case of the event when delivery schedules are being missed (the obligation is only laid on the bank);
• Credit card contracts or similar payment agreements are considered insurance contracts under IFRS 17 only if the company does not consider the risk for each customer when setting the contract price. However, even if the contract falls under the IFRS 9 scope, the issuer may be required to unbundle the insurance coverage component of such contract and recognise it under IFRS 17;
• Product warranties, if provided by a company other than the manufacturer, retailer or dealer or not in connection with the sale of the item (e.g. later in time);
• Fixed fee service contracts, e.g. if the entity carries out an assessment of risk associated with an individual customer in setting the price of the contract with each customer (e.g. on renewal of the contract), e.g. roadside assistance contract, etc.

The list is not exhaustive.

We recommend you contact Deloitte specialists in case of any doubts.