Accounting Services Overview of Insurance contract Under IFRS 17

Most accounting service providers in the UAE overlook insurance contract accounting entirely, since they aren’t in the insurance business themselves. With IFRS 17 now the applicable standard for insurance contracts, chartered accountants working across a range of industries should still confirm they aren’t inadvertently issuing arrangements that actually qualify as insurance contracts under the standard.

Understanding an Insurance Contract

Under IFRS 17, a contract means a binding agreement between two or more parties that imposes binding rights and obligations. It may be written, verbal, or implied through a business’s customary practices.

Legal jurisdictions, industries, and entities can have different practices and processes for establishing contracts with clients, and these can also vary within a single organization, sometimes influenced by customer class or the specific goods or services promised.

A contract contains explicit or implied terms, its rights and obligations. Laws and regulations are incorporated into a contract as implied terms, and a contract’s terms are enforceable under law.

Also check: How Audit Firms Identify Embedded Leases Within a Contract

The Relationship Between the Policyholder and the Issuer

Under IFRS 17, the issuer and policyholder of an insurance contract aren’t required to be unrelated parties. However, IFRS 17 does clarify:

Self-insurance doesn’t qualify as an insurance contract, since a party self-insuring prevents itself from actually transferring the risk to another party in the first place.

In a consolidated sense, group insurance arrangements function as self-insurance. In this case, such arrangements are reported as insurance contracts in the individual or separate accounts of the group entities involved, but not at the consolidated level.

Must check: Audit & Assurance Services

Understanding Insurance Risk

Insurance risk is typically distinguished from financial risk, which is accounted for as financial instruments under IFRS 9. Chartered accountants generally account for financial risk-only instruments accordingly.

Some arrangements, certain life insurance products among them, involve both financial and insurance risk simultaneously. For this reason, an agreement is regarded as an insurance contract where it carries a genuinely significant insurance risk component.

Where an arrangement gives rise to insurance risk, a key factor to assess is whether the entity would have to compensate the counterparty if certain non-financial events occur.

Worked Example: Distinguishing Insurance Risk From Financial Risk

First example: A non-insurer agrees to compensate a counterparty if a vehicle they own suffers a fire-related loss of value. This exposes the non-insurer to insurance risk, since the payout depends on an uncertain, non-financial event (whether the fire actually occurs).

Second example: By contrast, a non-insurer that only faces exposure to a change in an asset’s fair value due to general market movements, with no mechanism compensating the counterparty for physical damage like fire, faces financial risk instead, not insurance risk. The distinguishing factor is whether payment is triggered by an uncertain non-financial event (insurance risk) or purely by financial variables like market price movements (financial risk).

The Question of Compensation

A policyholder usually receives cash settlement as compensation from the insurer. Compensation can take several forms, including:

• Services such as replacement of goods, “new for old” replacement, or repair payments
• Release from the counterparty’s obligation to pay
• Exemption from paying a third party

Uncertain Future Event

A future event is considered uncertain unless at least one of the following remains unknown at the time the contract is negotiated:

• The likelihood of the insured event occurring
• Whether the insured event actually occurs
• If the insured event occurs, what amount the non-insurer will actually have to pay

A contract that pays a fixed amount if the policyholder dies can be considered an insurance contract, but only if, at the time the contract is entered into, the insured event is genuinely uncertain and not something already expected to happen imminently.

What Constitutes an Adverse Effect on the Policyholder, and Why It Matters

Insurance regulations are designed to protect policyholders from loss, particularly economic loss. Where an event occurs that would leave a policyholder facing financial loss without insurance coverage, this constitutes the adverse effect insurance is meant to protect against.

Examples include:

• Personal property, such as vehicles, equipment, land, or buildings, being stolen or damaged
• Death or disability
• Hospitalization
• Claims involving products, professionals, or the public
• An erroneous purchase

Payment in cash or in kind is generally provided in each of these situations, and a policyholder may also receive compensation by being relieved of an existing obligation, as noted above.

IFRS 17 Effective Date

IFRS 17 became effective for annual reporting periods beginning on or after 1 January 2023, and has been the applicable standard for insurance contracts since then. Entities were permitted to apply it early, provided both IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, were applied simultaneously.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., a trusted Accounting Firm, helps businesses assess whether their arrangements fall within IFRS 17’s scope and implement the standard correctly.

Contact Farahat & Co. today to discuss your IFRS 17 implementation requirements.