Scope (AASB1023_07-04_COMPmay19_01-20)

This Standard applies to:

(a) general insurance contracts (including general reinsurance contracts) that a general insurer issues and to general reinsurance contracts that it holds;

(b) certain assets backing general insurance liabilities;

(c) financial liabilities and financial assets that arise under non-insurance contracts; and

(d) certain assets backing financial liabilities that arise under non-insurance contracts.

There are various types of insurance contract. This Standard deals with general insurance contracts (including general reinsurance contracts). General insurance contracts are defined as insurance contracts that are not life insurance contracts.

This Standard applies to general insurance contracts issued by Registered Health Benefits Organisations (RHBOs) registered under the National Health Act 1953. RHBOs apply this Standard to contracts that meet the definition of a general insurance contract and to certain assets backing general insurance liabilities.

For ease of reference, this Standard describes any entity that issues an insurance contract as an insurer, whether or not the issuer is regarded as an insurer for legal, regulatory or supervisory purposes.

A reinsurance contract is a type of insurance contract. Accordingly, all references in this Standard to insurance contracts also apply to reinsurance contracts.

Weather derivatives that meet the definition of a general insurance contract under this Standard are treated under this Standard. A contract that requires payment based on climatic, geological or other physical variables only where there is an adverse effect on the contract holder is a weather derivative that is an insurance contract. To meet the definition of a general insurance contract, the physical variable specified in the contract will be specific to a party to the contract.

This Standard does not apply to:

(a) life insurance contracts (see AASB 1038 Life Insurance Contracts);

(b) product warranties issued directly by a manufacturer, dealer or retailer (see AASB 15 Revenue from Contracts with Customers and AASB 137 Provisions, Contingent Liabilities and Contingent Assets);

(c) employers’ assets and liabilities under employee benefit plans (see AASB 119 Employee Benefits and AASB 2 Share-based Payment) and retirement benefit obligations reported by defined benefit retirement plans (see AASB 1056 Superannuation Entities);

(d) contingent consideration payable or receivable in a business combination (see AASB 3 Business Combinations);

(e) contractual rights or contractual obligations that are contingent on the future use of, or right to use, a non-financial item (for example, some license fees, royalties, variable lease payments and similar items), as well as a lessee’s residual value guarantee embedded in a lease (see AASB 15, AASB 16 Leases and AASB 138 Intangible Assets);

(f) 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, in which case the issuer may elect to apply either AASB 9 Financial Instruments, AASB 132 Financial Instruments: Presentation and AASB 7 Financial Instruments: Disclosures or this Standard to such financial guarantee contracts. The issuer may make that election contract by contract, but the election for each contract is irrevocable;

(g) direct insurance contracts that the entity holds (that is direct insurance contracts in which the entity is a policyholder). However, a cedant shall apply this Standard to reinsurance contracts that it holds; and

(h) fixed-fee service contracts, that meet the definition of an insurance contract, if the level of service depends on an uncertain event, for example maintenance contracts or roadside assistance contracts (see AASB 4 Insurance Contracts).

AASB 9 Financial Instruments requires hybrid contracts that contain financial asset hosts to be classified and measured in their entirety in accordance with the requirements in paragraphs 4.1.1-4.1.5 of that Standard. However, AASB 9 requires an entity to separate some embedded derivatives from their financial liability hosts, measure them at fair value and include changes in their fair value in the statement of comprehensive income. AASB 9 applies to derivatives embedded in a general insurance contract unless the embedded derivative is itself a general insurance contract.

As an exception to the requirement in AASB 9, an insurer need not separate, and measure at fair value, a policyholder’s option to surrender an insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate) even if the exercise price differs from the carrying amount of the host insurance liability. However, the requirement in AASB 9 applies to a put option or cash surrender option embedded in an insurance contract if the surrender value varies in response to the change in a financial variable (such as an equity or commodity price or index), or a non-financial variable that is not specific to a party to the contract. Furthermore, that requirement also applies if the holder’s ability to exercise a put option or cash surrender option is triggered by a change in such a variable (for example, a put option that can be exercised if a stock market index reaches a specified level).

Some general insurance contracts contain both an insurance component and a deposit component. In some cases, an insurer is required or permitted to unbundle those components.

(a) Unbundling is required if both the following conditions are met:

(i) the insurer can measure the deposit component (including any embedded surrender options) separately (that is, without considering the insurance component); and

(ii) the insurer’s accounting policies do not otherwise require it to recognise all obligations and rights arising from the deposit component.

(b) Unbundling is permitted, but not required, if the insurer can measure the deposit component separately as in paragraph 2.4.1(a)(i) but its accounting policies require it to recognise all obligations and rights arising from the deposit component, regardless of the basis used to measure those rights and obligations.

(c) Unbundling is prohibited if an insurer cannot measure the deposit component separately as in paragraph 2.4.1(a)(i).

The following is an example of a case when an insurer’s accounting policies do not require it to recognise all obligations arising from a deposit component. A cedant receives compensation for losses from a reinsurer, but the contract obliges the cedant to repay the compensation in future years. That obligation arises from a deposit component. If the cedant’s accounting policies would otherwise permit it to recognise the compensation as income without recognising the resulting obligation, unbundling is required.

A general insurer, in considering the need to unbundle the deposit component of the general insurance contract, would consider all expected cash flows over the period of the contract and would consider the substance of the contract. For example, while some financial reinsurance contracts may require annual renewal, in substance they may be expected to be renewed for a number of years.

To unbundle a general insurance contract, an insurer shall:

(a) apply this Standard to the insurance component; and

(b) apply AASB 9 to the deposit component. When applying AASB 9, an insurer shall designate the deposit component as “at fair value through profit or loss”, on first application of this Standard or on initial recognition of the deposit component.