ISURANCE CONTRACTS BY Mohammad Fathi Aouf

* IFRS 4 was issued as part of the IASB’s Insurance Project as an interim standard in response to an urgent need for improved disclosure and accounting for insurance contracts ahead of the 2005 European adoption of IFRS. * A second phase of this project is now underway with a view to producing a final standard to replace IFRS 4.

An exposure draft was issued in July 2010 and the topic was re-exposed in June The 2013 ED proposes a single accounting model for all insurance contracts to be applied at a portfolio level. It prohibits the recognition of profits at the initial recognition of an insurance contract and requires an explicit current measurement of expected cash flows and a liability for risk and uncertainty. The proposed IFRS would apply to writers of both insurance and reinsurance contracts. * international financial reporting standards CERTIFICATE Learning materials by ICAEW

* Restarting with a “fresh look” * Consistent with IASB Framework * Consistent with principles in current standards (unless good reason to depart) * Creation of global standard for insurance contracts improving comparability and transparency * pwc_sic_080612_a_e

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 * IC-0310b06A

* The following are examples of contracts that are insurance contracts, if the transfer of insurance risk is significant * insurance against theft or damage to property * insurance against product liability, professional liability, civil liability or legal expenses * life insurance and prepaid funeral plans * life-contingent annuities and pensions * Surety Bonds, Fidelity Bonds, Performance Bonds and Bid Bonds

* disability and medical cover * Credit Insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. * Product Warranties. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of this IFRS.

* Title Insurance (ie insurance against the discovery of defects in title to land that were not apparent when the insurance contract was written). In this case, the insured event is the discovery of a defect in the title, not the defect itself. * Travel Assistance (ie compensation in cash or in kind to policyholders for losses suffered while they are travelling). Paragraphs B6 and B7 discuss some contracts of this kind

* Catastrophe Bonds that provide for reduced payments of principal, interest or both if a specified event adversely affects the issuer of the bond (unless the specified event does not create significant insurance risk, for example if the event is a change in an interest rate or foreign exchange rate) * Insurance Swaps and other contracts that require a payment based on changes in climatic, geological or other physical variables that are specific to a party to the contract * Reinsurance contracts

IFRS 4 does not apply to the following insurance contracts: * Product warranties issued directly by a manufacturer, dealer or retailer * employers’ assets and liabilities under employee benefit plans * retirement benefit obligations reported by defined benefit retirement plans * contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non- financial item, as well as a lessee’s residual value guarantee embedded in a finance 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 * contingent consideration payable or receivable in a business combination * direct insurance contracts that the entity holds * Australian CPA

* The final project from the convergence era is our work to introduce a new accounting Standard for insurance contracts. * As the accounting for insurance contracts is the reverse of many other forms of accounting, because cash is received in advance of the service being delivered.

* The old IASs inherited by the IASB provided no answer to the challenges of the insurance sector. That is why when the IASB began its work it introduced IFRS 4 Insurance Contracts as a stopgap measure while it completed a more fundamental reform of insurance accounting. * We expect to finalize this project in 2015 and we are working in close co-operation with the insurance sector to bring much-needed transparency to the plethora of accounting practices used throughout the industry * Annual Report IFRS Foundation

Unbundling is required if both: * An insurer can measure the deposit component separately – Local GAAP does not require recognition of all rights and obligations arising from the deposit component * If an insurer can measure the deposit component separately and local GAAP requires the recognition of all rights and obligations of the deposit component, unbundling is permitted, but not required * Unbundling is prohibited if an insurer cannot measure the deposit component separately. * 2011-hk-ifrs-lockerman-7

Can measure deposit component separately? All rights and obligations recognised? MUST NOT unbundle MAY unbundle MUST unbundle NO YES 15 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK.

IFRS 4 has two main principles for disclosure which require an insurer to disclose: * Information that identifies and explains the amounts in its financial statements arising from insurance contracts. * Information that enables users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts. * PWC Summary for IFRS 4

* Insurance Risk * Death * Illness * Disability * loss of property due to damage or theft * failure to debtor to make payment when due

* The risk of potential future change in one or more of: * Interest rates * Financial instrument price * Commodity price or rate * Credit rating or credit indices * Any other variable, expect for non-financial variable that specific to a party to the contract

* Insurance risk is significant if, and only if, an insured event could cause the issuer to pay amounts that are significant in any single scenario * excluding scenarios that have no commercial substance * If an insured event could mean that additional amounts that are significant would be payable in any scenario that has commercial substance, the condition in the previous sentence can be met even if the insured event is extremely unlikely or even if the expected present value of the contingent cash flows is a small proportion of the expected present value of all of the remaining cash flows from the insurance contract. * ED-Insurance-Contracts-June-2013

* In some accounting models, realized gains or losses on an insurer’s assets have a direct effect on the measurement of some or all of (a) its insurance liabilities, (b) related deferred acquisition costs and (c) related intangible assets. An insurer is permitted, but not required, to change its accounting policies so that a recognized but unrealized gain or loss on an asset affects those measurements in the same way that a realized gain or loss does.

* The related adjustment to the insurance liability (or deferred acquisition costs or intangible assets) shall be recognized in other comprehensive income if, and only if, the unrealized gains or losses are recognized in other comprehensive income. This practice is sometimes described as ‘shadow accounting’. * EN – EU IFRS 4