Nature and Extent of Risks Arising from Life Insurance Contracts (AASB1038_07-04_COMPmay19_01-20)

A life insurer shall disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from life insurance contracts.

To comply with paragraph 15.1, a life insurer shall disclose:

(a) its objectives, policies and processes for managing risks arising from life insurance contracts and the methods used to manage those risks;

(b) information about insurance risk (both before and after risk mitigation by reinsurance), including information about:

(i) sensitivity to insurance risk (see paragraph 15.1.3);

(ii) concentrations of insurance risk, including a description of how management determines concentrations and a description of the shared characteristic that identifies each concentration (e.g. type of insured event, geographical area, or currency); and

(iii) actual claims compared with previous estimates (i.e. claims development). The disclosure about claims development shall go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but need not go back more than ten years. A life insurer need not disclose this information for claims for which uncertainty about the amount and timing of claims payments is typically resolved within one year;

(c) information about credit risk, liquidity risk and market risk that paragraphs 31-42 of AASB 7 would require if the life insurance contracts were within the scope of AASB 7. However:

(i) a life insurer need not provide the maturity analyses required by paragraphs 39(a) and (b) of AASB 7 if it discloses information about the estimated timing of the net cash outflows resulting from recognised insurance liabilities instead. This may take the form of an analysis, by estimated timing, of the amounts recognised in the statement of financial position; and

(ii) if a life insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may use that sensitivity analysis to meet the requirement in paragraph 40(a) of AASB 7. Such a life insurer shall also provide the disclosures required by paragraph 41 of AASB 7; and

(d) information about exposures to market risk arising from embedded derivatives contained in a host insurance contract if the life insurer is not required to, and does not, measure the embedded derivatives at fair value.

The claims development disclosure required by paragraph 15.1.1(b)(iii) only applies to classes of business where claims are not typically resolved within one year. For many life insurance products this disclosure would not normally be required. Furthermore, claims development disclosure would not normally be needed for annuity contracts, for example, because each periodic payment arises, in effect, from a separate claim about which there is no uncertainty.

To comply with paragraph 15.1.1(b)(i), a life insurer shall disclose either (a) or (b) as follows:

(a) a sensitivity analysis that shows how profit or loss and equity would have been affected had changes in the relevant risk variable that were reasonably possible at the end of the reporting period occurred; the methods and assumptions used in preparing the sensitivity analysis; and any changes from the previous period in the methods and assumptions used. However, if a life insurer uses an alternative method to manage sensitivity to market conditions, such as an embedded value analysis, it may meet this requirement by disclosing that alternative sensitivity analysis and the disclosures required by paragraph 41 of AASB 7; and

(b) qualitative information about sensitivity, and information about those terms and conditions of life insurance contracts that have a material effect on the amount, timing and uncertainty of the life insurer’s future cash flows.