Insurance Contracts Phase I

Date recorded:


The staff proposed that insurance contracts be defined as follows:

An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk by agreeing with another party (the policyholder) to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary (other than an event that is only a change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable).

The definition was discussed and the following points were made:

  • Once the definition is finalised, it will replace the definition of insurance or insurance contracts in other Standards. Any Standard that scopes out insurance entities will be amended to scope out insurance contracts where relevant.
  • A previous version of the definition referred to "similar variable" at the end. Comment was made that the change to "other variable" created a circular definition with the exclusion of insurance contracts in the financial instruments Standards. It was proposed that the previous wording should be used.
  • An alternative proposal was that the definition should exclude "financial risks", which would be those variables that affect everyone when they change as opposed to variables that only affect one party (or a small group) when they change.

The definition will be examined by the staff and submitted back to the Board at a future meeting.

Insurable Interest

For a contract to be classified as an insurance contract, there needs to be an insurable interest. Some Board members expressed concern that this should only arise on inception to avoid a requirement to constantly examine for an insurable interest thereafter. Thus if a payment under the contract is not linked to an actual loss, the contract would not be an insurance contract but would more likely be a financial instrument.

Insurable Risk

To qualify as an insurance contract, there should be a reasonable chance of insurance risk arising. This will be defined based on factors such as the probability of the risk arising and the possible amount of the effect.


Reinsurance contracts will be treated as insurance contracts subject to their meeting the definition. No special traetment is proposed for reinsurance contracts.


A contact will be treated as an insurance contract from when it meets the definition of an insurance contract and for as long as it meets the definition.

Scope Exclusions

The Board agreed that the following would be excluded from being insurance contracts:

  • financial guarantees, including credit insurance. The reasons for this exclusion need to be articulated and compared to the final definition of insurance contracts;
  • product warranties issued directly by a manufacturer, dealer or retailer. Those issued by a third party would be included;
  • employers' assets and liabilities under employee benefit plans, including equity compensation plans;
  • retirement benefit obligations reported by defined benefit retirement benefit plans;
  • contingent consideration payable or receivable in a business combination;
  • contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, certain licence fees, royalties, contingent lease payments and similar items), as well as a lessee's residual value guarantees embedded in a finance lease. Residual value guarantees under operating leases would be classified as insurance contracts;
  • contracts for which the issuer is permitted or required to settle its obligations by: — acquiring new financial liabilities or equity instruments to be issued by the holder of the contract if the insured event occurs, or — issuing equity instruments as defined in IAS 32. (This is subject to the final wording of the definition of insurance contracts).

Recognition and Measurement

The Board agreed that paragraphs 5 and 6 of IAS 8, which state how accounting policies should be determined in the absence of a Standard, would be scoped out for insurance contracts.

Existing Practices

  • Catastrophe Provisions - Will not be allowed.
  • Loss Recognition Costs - It is proposed that if there is a loss recognition requirement in local GAAP that does not smooth the effect of the loss and that is based on a current estimate of future cash flows, that requirement should be applied. Otherwise IAS 37 should be applied to determine a minimum liability.
  • Embedded Value - If it is acceptable in local GAAP, then it can be used.
  • Offsetting of Reinsurance - Reinsurance should be accounted for on a gross basis and not offset.
  • Measurement Basis on Reinsurance - The taking of reinsurance would not change the measurement basis of the original insurance contract, but it may provide greater information in determining measurement.
  • Uniform Accounting Policies - An entity's use of uniform accounting policies for all insurance contracts will not be required if its past practice has been otherwise; but there will be a requirement to disclose the different components subject to the differing policies.

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