1. Contract boundaries Insurance IFRS Seminar December 1, 2016
Chris Hancorn
Session 14

2. Current IASB proposals
Agenda
Concept
Current IASB proposals
Implications

3. Contract Boundary Concept
The fulfilment cash flows are those cash flows from initial recognition of the contract to the contract boundary.
Normally, initial recognition is the earliest of :
The beginning of coverage; or
The date on which the first premium is due
The contract boundary is the point after which cash flows may not be recognized
Para 23: Cash flows are within the boundary of an insurance contract when the entity can compel the policyholder to pay the premiums or has a substantive obligation to provide the policyholder with coverage or other services.

4. Current IASB proposals
Cash flows are within the contract boundary when:
The insurer can “compel” the policyholder to pay premiums; or
The insurer has a “substantive obligation” to provide coverage
A “substantive obligation” ends if either:
The insurer has the “right or the practical ability” to reassess the risks at an individual contract level and set a price that fully reflects the risk; OR
Both of the following are true:
The insurer has the “right or the practical ability” to reassess the risks at the portfolio level and set a price that fully reflects the risks, and
The pricing up to that date doesn’t take into account risks related to future periods

5. Risk of contract incepts
Recognition
Contracts are recognised and included in the financial statements at the earliest of:
The beginning of the coverage period
When the first scheduled payment from the policyholder is due
When the portfolio of contracts to which the policy belongs becomes onerous
Risk of contract incepts
Contract boundary
Enter into contract
Valuation date
For example, a price for an annuity may be quoted to an applicant, with the quote valid for a period of time (e.g. 30 days). If the markets move adversely during this period, making the proposed contract onerous, then the contract would be valued in IFRS 17 (even though the quote has yet to be accepted by the policyholder).
Similarly, where quotes were made before underwriting changes (which would have resulted in a higher premium), the proposed contract must be tested to see if onerous.

6. Current IASB proposals
In assessing whether the “right or practical ability “ exists, all substantive rights and obligations should be taken into account – contractual, legal and regulatory.
The company should be able to set the same price it would for a newly issued contract
Therefore the same contract issued in two jurisdictions may have different treatments
The ED has generally aligned the definition of contract boundary more closely with the way companies price renewable contracts, as all future expected cash flows are more likely to be taken into account
This can make the difference between a short term (one year) liability and a large negative liability for renewable health contracts in Asia.

7. Questions: Contract Boundaries
1. For 25 year term assurances, with benefits paid on death of policyholder, premiums reviewable after 5 years at discretion of insurer (renewed on experience of portfolio), where is the contract boundary?
2. For a group life contract, renewable yearly, where is the contract boundary?
3. For employers liability contract (with no asbestos exclusion) with coverage period of one year, where is the contract boundary?
25 years
1 year
>50 years

8. Current IASB proposals
Insurance contracts often provide policyholders with the ability to change the amount, timing, nature or uncertainty of cash flows, for example, renewal and conversion options, options to cease paying premiums, etc.
The best estimate value captures such options on an expected basis;
The risk adjustment captures the company’s assessment of how actual cash flows may differ from expected
If insurance policy includes options, forwards or guarantees not falling within the existing contract boundary, they are accounted for as a new insurance contract or under other applicable standards.

9. Thank You