Disclosures Relating to Life Insurance Contracts and Life Investment Contracts (AASB1038_07-04_COMPmay19_01-20)

The following components of profit or loss shall be shown, separated between policyholder and shareholder interests:

(a)    profit related to movement in life insurance liabilities; 

(b)    profit related to movement in life investment contract liabilities and movement in assets or liabilities arising in respect of the management services element of life investment contracts;

(c)    investment earnings on assets in excess of policy liabilities; and

(d)    other items, separated into material components.

The following components of profit related to movements in life insurance liabilities, life investment contract liabilities and assets or liabilities arising in respect of the management services element of life investment contracts shall be shown:

(a)            planned margins of revenues over expenses;

(b)            the difference between actual and assumed experience;

(c)            the effects of changes to underlying assumptions;

(d)            loss recognition on groups of related products or reversal of previously recognised losses required by paragraph 8.6; and

(e)            other movements, separated into material components.

Restrictions attaching to assets held for the benefit of policyholders shall be disclosed.

There are a number of restrictions on the use of assets invested for policyholders in statutory funds.  It is important that these restrictions be disclosed so that users of the financial statements can assess their impact.

A life insurer shall separately disclose:

(a)            in respect of contracts with discretionary participation features, the amount of policy liabilities that relates to the guaranteed element;

(b)            in respect of investment-linked contracts, the amount of policy liabilities subject to investment performance guarantees; and

(c)            in respect of any other contracts not addressed in (a) or (b) with a fixed or guaranteed termination value, the amount of the current termination values.

Many life insurers issue contracts that provide some form of guarantee or assurance about the return of funds invested.  It is useful for users of life insurers’ financial statements to have information about the extent of such guarantees or assurances, since they involve the life insurer bearing investment risks on behalf of policyholders.

The following components of equity shall be disclosed:

(a)            retained earnings wholly attributable to shareholders; and

(b)            retained earnings where the allocation between participating policyholders and shareholders has yet to be determined.

Information about the different components of retained earnings is useful in meeting the accountability obligations of the life insurer for the whole business and in showing the relative positions of the major stakeholders.

A life insurer that has issued participating business may have “retained profits” generated from that business.  In relation to Australian participating policyholders, these “retained profits” are liabilities in accordance with the Life Insurance Act.  However, in friendly societies or foreign life insurance operations, “retained profits” may exist which have yet to be allocated between policyholders and shareholders.  Such “retained profits” are separately disclosed.  It is relevant to note that “retained profits” directly attributable to shareholders may reside in both statutory funds and a shareholder fund.

Where, in friendly societies or foreign life operations, “retained profits” exist, which have yet to be allocated and which are treated as equity then the insurer applies paragraphs 17.5.4 and 17.5.5 to this participating business.

Where a life insurance contract with a discretionary participation feature is issued by a friendly society or foreign life operation, the issuer of such a contract:

(a)            may, but need not, recognise the guaranteed element separately from the discretionary participation feature.  If the issuer does not recognise them separately, it classifies the whole contract as a liability.  If the issuer classifies them separately, it classifies the guaranteed element as a liability;

(b)            shall, if it recognises the discretionary participation feature separately from the guaranteed element, classify that feature as either a liability or a separate component of equity.  This Standard does not specify how the issuer determines whether that feature is a liability or equity.  The issuer may split that feature into liability and equity components and shall use a consistent accounting policy for that split.  The issuer shall not classify that feature as an intermediate category that is neither liability nor equity;

(c)            may recognise all premiums received as revenue without separating any portion that relates to the equity component.  The resulting changes in the guaranteed element and in the portion of the discretionary participation feature classified as a liability shall be recognised in profit or loss.  If part of the entire discretionary participation feature is classified in equity, a portion of profit or loss may be attributable to that feature (in the same way that a portion may be attributable to minority interests).  The issuer shall recognise the portion of profit or loss attributable to any equity component of a discretionary participation feature as an allocation of profit or loss, not as expense or income (see AASB 101 Presentation of Financial Statements);

(d)            shall, if the contract contains an embedded derivative within the scope of AASB 9, apply AASB 9 to that embedded derivative; and

(e)            shall, in all respects not described in paragraphs 14-20 of AASB 4 and paragraphs 34(a)-(d) of AASB 4, continue its existing accounting policies for such contracts, unless it changes those accounting policies in a way that complies with paragraphs 21-30 of AASB 4.

The requirements in paragraph 17.5.4 also apply to a life investment contract issued by a friendly society or foreign life insurer that contains a discretionary participation feature.  In addition:

(a)            if the issuer classifies the entire discretionary participation feature as a liability, it shall apply the liability adequacy test in paragraph 8.6 to the whole contract (i.e. both the guaranteed element and the discretionary participation feature).  The issuer need not determine the amount that would result from applying AASB 9 to the guaranteed element;

(b)            if the issuer classifies part or all of the discretionary participation feature as a separate component of equity, the liability recognised for the whole contract shall not be less than the amount that would result from applying AASB 9 to the guaranteed element.  That amount shall include the intrinsic value of an option to surrender the contract, but need not include its time value if paragraph 2.2.2 exempts that option from measurement at fair value.  The issuer need not disclose the amount that would result from applying AASB 9 to the guaranteed element, nor need it present that amount separately.  Furthermore, the issuer need not determine that amount if the total liability recognised is clearly higher;

(c)            although these contracts are financial instruments, the issuer may continue to recognise the premiums for those contracts as revenue and recognise as an expense the resulting increase in the carrying amount of the liability, subject to the requirements of paragraphs 5.1 and 5.2; and

(d)            although these contracts are financial instruments, an issuer applying paragraph 20(b) of AASB 7 to contracts with a discretionary participation feature shall disclose the total interest expense recognised in profit or loss, but need not calculate such interest expense using the effective interest method. 

A life insurer shall disclose the regulatory capital position of each statutory fund.  In consolidated financial statements a group shall disclose the regulatory capital position of each life insurer in the group.

The nature and amount of the life insurer’s activities relating to managed funds and trust activities, and whether arrangements exist to ensure that such activities are managed independently from its other activities, shall be disclosed.

The following shall be disclosed in notes:

(a)            if other than the end of the reporting period, the effective date of the actuarial report on policy liabilities and regulatory capital reserves;

(b)            the name and qualifications of the actuary;

(c)            whether the amount of policy liabilities has been determined in accordance with the requirements of the Life Insurance Act; and

(d)            whether the actuary is satisfied as to the accuracy of the data from which the amount of policy liabilities has been determined.

An insurer shall disclose the process used to determine which assets back life insurance liabilities or life investment contract liabilities.

Australian Accounting Standards and the Life Insurance Act differ in their requirements.  Accordingly, life insurers are encouraged to disclose a reconciliation between:

(a)            the profit for the reporting period reported under Australian Accounting Standards and the profit for the reporting period reported under the Life Insurance Act; and

(b)            the retained earnings at the end of the reporting period in accordance with Australian Accounting Standards and the retained earnings at the end of the reporting period in accordance with the Life Insurance Act.

This Standard addresses disclosure requirements in relation to life insurance contracts and certain disclosure requirements in relation to life investment contracts.  Other Australian Accounting Standards may be relevant to a life insurer’s financial statements.  In particular, the disclosure requirements in AASB 7 would normally be relevant to life insurers.