AASB 1038

[Deleted by the AASB]

This Standard applies to annual reporting periods beginning on or after 1 January 2005. [Note: For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]

This Standard shall not be applied to annual reporting periods beginning before 1 January 2005.

[Deleted by the AASB]

[Deleted by the AASB]

For the purposes of AASB 134 Interim Financial Reporting, the determination of policy liabilities does not necessarily require a full actuarial valuation. In accordance with AASB 134, policy liabilities would need to be determined on a reliable basis, would be based on reasonable estimates, would include a full review of all assumptions, and would not be materially different from the policy liabilities determined by a full actuarial valuation.

When operative, this Standard supersedes AASB 1038 Life Insurance Business as approved by public notice in the Commonwealth of Australia Gazette No 546, 19 November 1998.

AASB 1038 (issued in November 1998) remains applicable until superseded by this Standard.

Notice of this Standard was published in the Commonwealth of Australia Gazette No S 294, 22 July 2004.

This Standard applies to:

A life insurance contract is:

All other insurance contracts are general insurance contracts and are treated under AASB 1023 General Insurance Contracts or AASB 4 Insurance Contracts.

A life insurer is defined as an insurer or reinsurer, registered under the Life Insurance Act, who issues life insurance contracts or life investment contracts, or a similar entity operating outside Australia.

This Standard applies to life insurance contracts issued by friendly societies registered under the Life Insurance Act. Private health insurance contracts that are issued under the National Health Act 1953 by friendly societies registered under the Life Insurance Act are excluded from the scope of this Standard. Private health insurance contracts issued under the National Health Act are treated under AASB 1023.

Life insurers often sell contracts that do not meet the definition of a life insurance contract in this Standard. These contracts are referred to as life investment contracts for the purposes of this Standard. Section 12 addresses the requirements in relation to life investment contracts.

A financial instrument with a discretionary participation feature, issued by a life insurer, is defined as a life insurance contract for the purposes of this Standard and in measuring the life insurance liability, issuers of such instruments would apply paragraph 8.9. AASB 7 Financial Instruments: Disclosures addresses additional disclosure in relation to these financial instruments.

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 life insurance contract unless the embedded derivative is itself a life 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).

Paragraph 2.2.2 applies equally to options to surrender a financial instrument containing a discretionary participation feature.

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

Unbundling is permitted if the insurer can measure the deposit component separately.

If a life insurer cannot measure the deposit component separately, an insurer shall not unbundle the deposit component.

To unbundle a life insurance contract, a life insurer:

The purpose of this Standard is to:

Equity in a shareholder-owned life insurer will generally comprise only shareholder equity. Although participants in the industry commonly refer to “policyholder retained profits”, in relation to Australian business such amounts are unvested policyholder benefits liabilities. Under Australian legislation, “policyholder retained profits” relating to Australian life insurance business are paid to policyholders, although the timing of the payment is at the discretion of the life insurer. A life insurer may have unallocated surplus that is in the nature of “policyholder equity” if it is a friendly society or has foreign life insurance operations in a jurisdiction that permits retained profits to remain unallocated between policyholders and shareholders, and the policyholders’ component has yet to be determined. A key factor in evaluating the classification as liability or equity of retained profits in a friendly society is the benefit fund rules of each particular benefit fund. If the rules of a benefit fund were such that all retained profits by default are for the benefit of policyholders, such retained profits would be classed as policyholder benefit liabilities.

Subject to paragraph 5.2, insurance components of life insurance contract premiums are income and insurance components of life insurance contract claims are expenses and shall be recognised separately in the statement of comprehensive income. Deposit components of life insurance contract premiums are not income and deposit components of life insurance contract claims are not expenses and shall be recognised as changes in life insurance liabilities.

For life insurance contracts where unbundling of the deposit component is prohibited under paragraph 2.3.3, premiums shall be recognised as income and claims shall be recognised as expenses.

A wide variety of products are offered by life insurers – risk or insurance products, investment products and numerous hybrids of these two products. There will be hybrid products that fall within the scope of this Standard that have both deposit and insurance components.

Premiums may comprise amounts that give rise to:

Similarly, claims may comprise amounts that give rise to:

A cedant shall recognise:

Life insurers may reinsure some of their business. The cedant remains responsible for the total amount of successful claims of policyholders and, through reinsurance arrangements, may be entitled to recover amounts relating to some of those claims.

Reinsurance contracts are considered to be separate transactions from the original life insurance contracts and therefore give rise to separately recognisable amounts. The cedant recognises the gross amount of premiums received in accordance with paragraphs 5.1 and 5.2 and, where portions of the policies are reinsured, the ceded premiums are recognised as expenses (except where they would otherwise be recognised as deposits, if not reinsured). Any recoveries from reinsurers are recognised as income by the cedant (except for any amounts representing the return of deposits). Consistent with this approach, the gross amount of life insurance liabilities is recognised as a liability and claim recoveries not yet received from a reinsurer are recognised as a receivable by the cedant.

Inwards reinsurance premiums and outwards reinsurance claims shall be recognised by the accepting reinsurer as for premiums and claims in accordance with paragraphs 5.1 and 5.2. Life insurance liabilities assumed shall be recognised as a liability by the accepting reinsurer in accordance with section 8.

From the perspective of the reinsurer, reinsurance premiums accepted are recognised in the same way as the cedant treats the acceptance of premiums under a direct insurance contract. Correspondingly, claims paid and payable to direct insurers are recognised as expenses by the reinsurer. Consistent with these treatments, life insurance liabilities assumed are recognised as a liability by the accepting reinsurer.

If a cedant’s reinsurance asset is impaired, the cedant shall reduce its carrying amount accordingly and recognise that impairment in the statement of comprehensive income. A reinsurance asset is impaired if, and only if:

Obligations arising from life insurance contracts (life insurance liabilities) shall be recognised as liabilities and shall be measured at the end of each reporting period as:

The participating benefits component of life insurance liabilities includes previously vested benefits and future supportable bonuses. In addition to life insurance liabilities, there may be other liabilities that relate to participating policyholders. Insurance contract benefits attributable to participating policyholders that are not yet vested with specific policyholders are recognised as liabilities. These are further discussed in section 9.

Premiums are generally received in advance of the provision of services to policyholders, including the payment of claims. In return for premiums, life insurers provide services sometimes over long periods. Entering into a life insurance contract is considered to be the event that gives rise to future benefits and present obligations under a policy.

Where there are a number of variables relating to future uncertainties, a net present value approach to measuring life insurance liabilities is likely to provide the most appropriate measurement basis.  The obligations under these more complex contracts are generally measured as the present value of the expected inflows, such as premiums and fees, and outflows, such as claims and other expenses, based on assumptions relating to whole populations of policyholders, and taking into account applicable taxation.

An accumulation approach involves accruing the entitlements in policyholders’ records at the end of the reporting period.  If the fees expected to be charged by the life insurer to the policyholder in each future reporting period are expected to equal or exceed any expenses incurred by the life insurer, the life insurance liability calculated under the accumulation approach would not be materially different from that obtained using the approach in paragraph 8.1(a).

The ultimate cost of meeting claims under many life insurance contracts depends on the frequency of occurrence of particular future events such as death and surrender and in some cases may depend upon other factors such as the future levels of investment returns.  Assumptions need to be made about these future events.  In order to ensure that life insurance liabilities are measured reliably, such assumptions need to be “best estimates”.

Best estimate assumptions used in determining the present value of life insurance liabilities, such as the best estimate of the bonus rate, are made on the basis of the assets available to the life insurer at the end of the reporting period and do not include any allowance for future contributions by owners and other funds which may be provided in the future to support the business.

Life insurance contracts written in one reporting period often give rise to benefits to the life insurer in subsequent reporting periods, such as future management fees and surrender penalties. Therefore, there are future benefits associated with the costs of acquiring life insurance contracts, and such costs are often substantial.

In the life insurance industry, acquisition costs are usually recognised as expenses in the reporting period in which they are incurred. This is generally offset by identifying a portion of the planned margins included in life insurance liabilities as relating to the recovery of acquisition costs. The most useful and reliable information available about the acquisition costs that will give rise to future economic benefits is the amount of future charges for acquisition costs identified as part of the process of determining life insurance liabilities.

Planned margins of revenues over expenses for life insurance contracts shall be recognised in the statement of comprehensive income over the reporting periods during which the services, to which those margins relate, are provided to policyholders, and the revenues, relating to those services, are received.

In setting premium rates, life insurers will include planned margins of revenues over expenses. As noted in paragraph 8.1.2, premiums are generally received in advance of the provision of services to policyholders.

In this Standard, planned margins are recognised in the statement of comprehensive income when, and only when, the life insurer has performed the services necessary to establish a valid claim to those margins and has received the revenues relating to those services. To ensure that planned margins are recognised during the reporting period in which the relevant services are provided, life insurance liabilities include a component relating to those margins. These margins are then “released” based on one or more factors or “profit carriers” which correspond to the performance of services and the earning of the margins. In relation to many products, the profit carrier might be premiums or claims.

Except in relation to investment earnings rate assumptions for participating business, the effect of changes in life insurance liabilities resulting from a difference between actual and assumed experience determined during the reporting period shall be recognised in the statement of comprehensive income as income or expenses in the reporting period in which the changes occur.

The assumed patterns and frequencies of events used in determining life insurance liabilities are compared with actual events in each reporting period to assess their accuracy. The effects of differences between actual and assumed experience represents decreases or increases in the expected payments to policyholders and are income or expenses of the reporting period in which the differences occur. For example, where the assumed costs of death claims under a renewable term life product line are greater than the actual costs for a reporting period, income equal to the difference is recognised in the statement of comprehensive income for the current reporting period.

The recognition of the net amount of changes in life insurance liabilities resulting from a difference between actual and assumed experience identified during the reporting period as income or an expense is consistent with the use of assumptions that are best estimates as at the end of each reporting period.

Assumptions used for measuring life insurance liabilities shall be reviewed for each reporting period.  Where the review leads to changes in assumptions, with the exception of new business, the changes shall be deemed to occur at the end of the reporting period.

Assumptions used for measuring new business may be deemed to have occurred at the beginning of the reporting period, or at the date of commencement of the new business or at the end of the reporting period.

In preparing interim financial reports, the end of the reporting period is the end of the interim reporting period.  Accordingly, changes in assumptions are deemed to occur at the end of the interim reporting period.

The financial effects of changes to the assumptions underlying the measurement of life insurance liabilities made during the reporting period shall be recognised in the statement of comprehensive income over the future reporting periods during which services are provided to policyholders, except that:

The assumptions underlying the measurement of life insurance liabilities are reviewed at the end of each reporting period.  Based on past experience and revised expectations about the future, it may become apparent that particular assumptions are not consistent with likely future experience and need to be changed.  Such changes are effectively a reassessment of the likely patterns and frequencies of future events.  The normal revision of assumptions is not considered to be an error.

Apart from the circumstances identified in paragraph 8.5, changes to underlying assumptions are effectively recognised over future reporting periods by adjusting the planned margins included in life insurance liabilities.  If the effect of a changed assumption is a decrease in the present value of present obligations to policyholders, the planned margin is increased.  If the effect is an increase in the present value of obligations to policyholders, the planned margin is reduced.  The overall amount of life insurance liabilities is not affected by these changes to underlying assumptions, as long as the planned margin of revenues over expenses is not eliminated.

Material calculation errors and similar errors are treated in accordance with AASB 108.  Under AASB 108, except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error, an entity corrects material prior period errors retrospectively in the first financial statements authorised for issue after their discovery by:

As with other assumptions, the discount rates and related economic assumptions used in determining life insurance liabilities are reviewed at the end of each reporting period. The effects of a change to adopted discount rates and related economic assumptions caused by changes in investment market and economic conditions are recognised in the reporting period in which the change is made. For a life insurer with a typical spread of investments, if market yields fall, investment values generally rise and the resulting increases in investment values are recognised as income in the reporting period in which they occur. Where the discount rates are adjusted in line with such falls in market rates, life insurance liabilities for such contracts will increase and an expense will be recognised, having an offsetting (but not usually matching) effect on the increased investment values.

In relation to participating business (which is discussed in section 9), the effect of a change to the assumptions about discount rates, explained in paragraph 8.5.4, is a result of adjusting the best estimate of life insurance liabilities, including future participating benefits. For example, if market rates of return rise, investment values generally fall and the resulting decreases in investment values are recognised as an expense in the reporting period in which they occur. The fall in investment values will clearly impact on the ability of the life insurer to support future participating benefits. These are likely to be reduced, with an offsetting effect on the reduced investment values.

Life insurers shall perform a liability adequacy test.

Situations may arise where the present value of the planned margin of revenues over expenses for a group of related products will be adjusted as a result of changing underlying assumptions to the extent that the planned margin is eliminated and becomes a planned loss. That is, a review of expected future cash flows indicates that the present value of estimated future expenses for a group of related products exceeds the present value of estimated future revenues. In such circumstances, the excess of the present value of expenses over revenues arising during the reporting period is recognised in the statement of comprehensive income in the reporting period in which the assessment is made. The loss reflects a higher present obligation due to adverse future experience, which is now expected in future years. Whilst the future cash flows giving rise to the loss are yet to occur, this treatment is justified on the basis that entering into life insurance contracts is an event that gives rise to a present obligation to meet the expected future claims.

A group of related products, for the purpose of the calculating the planned margin, performing the liability adequacy test and for disclosure, would be products that have substantially the same contractual terms and were priced on the basis of substantially the same assumptions.

In reviewing expected future cash flows, the insurer takes into account both future cash flows under insurance contracts it has issued and the related reinsurance contracts.

Where an intangible asset has arisen under paragraph 13.1.1(b), a loss arises when the present value of planned margins of revenues over expenses is less than the related intangible asset. This test is to be performed for groups of related products and the intangible asset is allocated, on a reasonable basis, across these groups. Any loss is recognised as an expense in the statement of comprehensive income. In recognising the loss in the statement of comprehensive income, the life insurer first writes down the related intangible asset and then reflects any additional liability in the life insurance liabilities.

To the extent that the benefits under life insurance contracts are not contractually linked to the performance of the assets held, the life insurance liabilities shall be discounted for the time value of money using risk-free discount rates based on current observable, objective rates that relate to the nature, structure and term of the future obligations. 

To the extent that the benefits under life insurance contracts are contractually linked to the performance of the assets held, the life insurance liabilities shall be discounted using discount rates based on the market returns on assets backing life insurance liabilities.

In applying paragraph 8.7, the discount rates adopted are not intended to reflect risks inherent in the liability cash flows, which might be allowed for by a reduction in the discount rate in a fair value measurement, nor are they intended to reflect the insurance and other non-financial risks and uncertainties reflected in the life insurance liabilities. The discount rates are not intended to include allowance for the cost of any options or guarantees that are separately measured as part of the life insurance liabilities.

In applying paragraph 8.7, typically, government bond rates may be appropriate discount rates for the purposes of this Standard, or they may be an appropriate starting point in determining such discount rates.

Financial instruments with discretionary participation features are life insurance contracts for the purposes of this Standard and shall be treated in accordance with paragraphs 8.1 to 8.8 and section 9.

Except for transfers from unvested policyholder benefits liabilities, participating benefits vested in policyholders in relation to the reporting period shall be recognised in the statement of comprehensive income as expenses for the reporting period.  Such benefits which remain payable as at the end of the reporting period shall be recognised as a component of life insurance liabilities.  

Participating benefits that have been allocated in relation to the reporting period to participating policyholders generally, but that have not yet vested in specific policyholders, shall be recognised as expenses for the reporting period.  Amounts that have been allocated to participating policyholders generally, but that have not vested in specific policyholders as at the end of the reporting period, shall be recognised as unvested policyholder benefits liabilities.

Some life insurers sell participating business.  Participating policyholders are generally eligible to receive the same types of benefits as other policyholders and, in addition, are entitled to participate in the profits relating to participating business.  For example, a participating policyholder may receive a low contractually determined rate of return on savings together with term life cover and, in addition, receive benefits that depend on the investment performance of the pool of assets associated with participating policies and on the risk experience of participating policyholders.  These additional benefits are often called bonuses and are at the discretion of the life insurer.  In some reporting periods the life insurer may withhold a portion of the “profits” from the pool of participating business and recognise these “profits” as unvested policyholder benefits liabilities.  In other reporting periods the life insurer may “top up” the vested benefits to participating policyholders.  Such vesting of benefits is often done to provide a reasonably level vesting of benefits over time, despite volatility in periodic profits from participating business. 

It is sometimes argued that the discretionary nature of participating benefits means that they should be treated as appropriations of profit in the same way as dividends to shareholders.  Because life insurance liabilities relating to all types of policyholders are recognised as liabilities under the Life Insurance Act (excluding some contracts issued by friendly societies), it is appropriate for the participating benefits vested in relation to the reporting period, other than transfers from unvested policyholder benefits liabilities, to be recognised as expenses of the reporting period.  

Mutual life insurers are effectively owned by their policyholder members.  Nevertheless, the mutual life insurer also has obligations to its policyholders.  These obligations are classified as policy liabilities.  Benefits vested in a mutual life insurer’s policyholders, other than transfers from unvested policyholder benefits liabilities, are also to be recognised as expenses in the reporting period in which they are vested.

For financial reporting purposes, participating benefits vested in policyholders in a reporting period but not yet paid are included in life insurance liabilities and are measured at net present values.  In the case of investment account participating business this may be approximately the same as the amount actually allocated to policyholder accounts.  In the case of traditional participating business, there may be a significant difference between the net present value and the face value of the amount vested in policyholders.  The net present value is relevant for financial reporting purposes because it is the best estimate of the net present value of the amount that the life insurer expects to pay out in the future using information based on experience up to the end of the reporting period.  

Where a life insurer “tops up” the vested benefits from previously recognised unvested policyholder benefits liabilities, a transfer between liabilities is recognised.  If a life insurer tops up the vested benefits for participating policyholders other than from unvested policyholder benefits liabilities, the amount of the “top up” is recognised as an expense of the reporting period in which the additional benefits are vested.  

Paragraphs 10.2 to 10.7.2 address the measurement of certain assets backing life insurance liabilities or life investment contract liabilities.  The fair value approach to the measurement of assets backing life insurance liabilities or life investment contract liabilities is consistent with the present value measurement approach for life insurance liabilities required by this Standard and the fair value measurement approach for life investment contract liabilities required by this Standard.  Where assets are not backing life insurance liabilities or life investment contract liabilities life insurers apply the applicable accounting standards making use of any measurement choices available.  

Financial assets that:

shall be designated as “at fair value through profit or loss” under AASB 9 on first application of this Standard, or on initial recognition.

An insurer applies AASB 9 to its financial assets. Under AASB 9 a financial asset is classified and measured at fair value through profit or loss when:

AASB 1 First-time Adoption of Australian Accounting Standards permits entities to designate financial assets as “at fair value through profit or loss” on first application of the Standard.

The view adopted in this Standard is that, in all but rare cases, financial assets within the scope of AASB 9 that back life insurance liabilities or life investment contract liabilities are permitted to be measured at fair value through profit or loss under AASB 9.  This is because the measurement of life insurance liabilities under this Standard incorporates current information and measuring the financial assets backing these life insurance liabilities at fair value eliminates or significantly reduces a potential measurement or recognition inconsistency which would arise if the assets were classified and measured at amortised cost or fair value through other comprehensive income (refer to AASB 9 paragraph B4.1.30(a)).

Investment property that is within the scope of AASB 140 Investment Property and that backs life insurance liabilities or life investment contract liabilities shall be measured at fair value using the fair value model under AASB 140 and AASB 13 Fair Value Measurement.

Property, plant and equipment that is within the scope of AASB 116 Property, Plant and Equipment and that backs life insurance liabilities or life investment contract liabilities shall be measured using the revaluation model under AASB 116.

Investments in associates that:

shall be designated as “at fair value through profit or loss” under AASB 9 on first application of this Standard, or on initial recognition.

An insurer applies AASB 128 to its investments in associates.  AASB 128 requires investments in associates to be accounted for using the equity method.  When investments in associates are held by mutual funds, unit trusts and similar entities including investment-linked insurance funds, AASB 128 permits the investments in those associates to be measured at fair value through profit or loss in accordance with AASB 9.

Venturers’ interests in joint ventures that:

shall be designated as “at fair value through profit or loss” under AASB 9, on first application of this Standard, or on initial recognition.  

AASB 11 requires a joint venturer to recognise its interest in a joint venture as an investment and to account for that investment using the equity method in accordance with AASB 128 unless exempted from applying that method.  AASB 128 permits mutual funds, unit trusts and similar entities including investment-linked insurance funds to measure investments in joint ventures at fair value through profit or loss in accordance with AASB 9.

When preparing separate financial statements, those investments in subsidiaries, joint ventures and associates that:

shall be designated as “at fair value through profit or loss” under AASB 9, on first application of this Standard or on initial recognition. 

An insurer applies AASB 127 to its investments in subsidiaries, joint ventures and associates when preparing separate financial statements.  Under AASB 127, in the parent’s separate financial statements, the investments in subsidiaries, joint ventures and associates can either be accounted for at cost or in accordance with AASB 9.  

In the parent’s separate financial statements, investments in subsidiaries, joint ventures and associates, that are within the scope of AASB 127, that the insurer considers back life insurance liabilities or life investment contract liabilities, and that are permitted to be designated as “at fair value through profit or loss” under AASB 9, are designated as “at fair value through profit or loss” under AASB 9, on first application of this Standard or on initial recognition.

Subject to paragraph 18.3, a life insurer shall recognise imputed inflows and outflows as income and expenses when, and only when, such imputed flows relate to transactions with external entities.

Life insurers often impute inflows and outflows to different classes of policyholders in order to help ensure that they are treated equitably. For example, a life insurer may own the buildings that it occupies. The funds of a particular group of policyholders are used to acquire and operate such buildings whilst a wider group of policyholders and shareholders may benefit from the use of the buildings. In the owner-occupied building example, the life insurer imputes an inflow of rent income to the policyholders whose funds are used to acquire and operate the buildings and imputes an outflow of rent cost to the other policyholders and to shareholders.

In cases where there are no transactions with external entities, such as with owner-occupied buildings, the life insurer is dealing with itself. There is no transaction or other past event that gives rise to income or an expense. Any inflows and outflows imputed for internal management purposes would be eliminated in preparing external financial statements except in relation to the disaggregated disclosures required by paragraphs 18.1 and 18.2.

In some cases, life insurers impute inflows and outflows where external entities are involved. For example, life insurers often lend funds to their employees at concessional rates of interest with the funds being provided by a particular group of policyholders, whilst other policyholders and any shareholders benefit from the services provided by those employees. Because external parties are involved, such imputed inflows and outflows are recognised as income and expenses when they can be reliably measured.

Life investment contract liabilities, that are permitted to be designated as “at fair value through profit or loss” under AASB 9, shall be designated as “at fair value through profit or loss” under AASB 9 on first application of this Standard, or on initial recognition.

The view adopted in this Standard is that, in all but rare cases, life investment contract liabilities within the scope of AASB 9 are permitted to be measured at fair value through profit or loss under AASB 9. This is because, when a life investment contract liability is backed by a financial asset measured at fair value through profit or loss, designating the life investment contract liability at fair value through profit or loss eliminates or significantly reduces a potential measurement inconsistency which would arise if the life investment contract liability were measured at amortised cost. In addition, in the vast majority of cases, life investment contract liabilities would be managed and their performance would be evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

Some life investment contracts involve both the origination of one or more financial instruments and the provision of management services. Life investment contract liabilities arise under the financial instrument element and are treated under AASB 139. The management services element, including associated incremental costs of obtaining a contract, is treated under AASB 15 Revenue from Contracts with Customers; this element may also give rise to assets and liabilities.

To comply with AASB 3 Business Combinations, an insurer shall, at the acquisition date, measure at fair value the insurance liabilities assumed and insurance assets acquired in a business combination. However, an insurer is permitted, but not required, to use an expanded presentation that splits the fair value of acquired insurance contracts into two components:

An insurer acquiring a portfolio of life insurance contracts may use an expanded presentation described in paragraph 13.1.1.

The intangible assets described in paragraphs 13.1.1 and 13.1.2 are excluded from the scope of AASB 136 Impairment of Assets and from the scope of AASB 138 Intangible Assets in respect of recognition and measurement.  AASB 136 and AASB 138 apply to customer lists and customer relationships reflecting the expectation of future contracts that are not part of the contractual insurance rights and contractual insurance obligations that existed at the date of a business combination or portfolio transfer.

AASB 138 includes disclosure requirements in relation to this intangible asset.

Where a life insurer recognises an intangible asset under paragraph 13.1.1(b), this intangible asset is considered when performing the liability adequacy test referred to in paragraph 8.6.

A life insurer shall disclose information that identifies and explains the amounts in its financial statements arising from life insurance contracts.

To comply with paragraph 14.1, a life insurer shall disclose:

When applying paragraph 14.1.1(b) and disclosing recognised income arising from life insurance contracts, life insurers would normally disclose income from direct and reinsurance business. In accordance with the principles embodied in this Standard, with the exception of premium revenue recognised in accordance with paragraph 5.1, all revenues are recognised and disclosed before the effects of any transfers to or from life insurance liabilities. Disclosure of the effects of transfers to and from life insurance liabilities is required by paragraph 14.1.1(e).

In accordance with the principles embodied in this Standard, with the exception of claims expense recognised in accordance with paragraph 5.1, all expenses are recognised and disclosed before the effects of any transfers to or from life insurance liabilities. Disclosure of the effects of transfers to and from life insurance liabilities is required by paragraph 14.1.1(e).

To disclose and explain the expenses arising from life insurance contracts, life insurers would normally disclose:

When applying paragraphs 14.1.1(c) and 14.1.1(d) and disclosing the process used to determine assumptions, quantified disclosure of assumptions and the effect of changes in assumptions, the life insurer would normally show the impact of changes in assumptions on future profit margins and life insurance liabilities. The assumptions that would normally have the greatest effect on the measurement of recognised amounts described in paragraph 14.1.1(b) are:

When applying paragraph 14.1.1(b) and disclosing the recognised liabilities arising from life insurance contracts, life insurers would normally disclose the following components of life insurance liabilities:

When a life insurer is presenting the disclosures required by paragraphs 14.1.1(c) and 14.1.1(d) the insurer determines the level and extent of disclosure that is appropriate having regard to its circumstances and the qualitative characteristics of financial statements under the Conceptual Framework for Financial Reporting (as identified in AASB 1048 Interpretation of Standards).

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:

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:

Where any premiums and any claims are separated into their revenue, expense and change in life insurance liability components in accordance with paragraph 5.1, total premiums and total claims shall be disclosed.

The mix of products written by a life insurer will vary between life insurers. Comparability between life insurers is enhanced by the disclosure of total premiums and total claims.

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

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:

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:

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:

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:

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 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:

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

For each statutory fund and for the shareholder fund the following shall be disclosed:

Disaggregated information for each life fund and the shareholder fund is useful because, under Australian legislation, each life insurer may have more than one fund and, in general, the assets of each life fund are only available to meet the liabilities and expenses of that life fund.

A life insurer shall disclose the information required by paragraphs 18.1(a) to 18.1(m) disaggregated between those amounts relating to investment-linked business and those relating to non-investment-linked business.

The risks and potential rewards for a life insurer differ substantially as between investment-linked business and non-investment-linked business. Accordingly, disaggregated information about these is considered to be useful in assessing the financial performance and financial position of a life insurer. The information required by paragraph 18.2 is for the entity’s life insurance business as a whole; it is not required for each life fund.

[Deleted by the AASB]

Disclosures required by paragraphs 18.1 and 18.2 shall include all imputed inflows and outflows as income and expenses where they can be reliably measured.

As discussed in paragraph 11.1.1, life insurers often impute inflows and outflows to different classes of policyholders and shareholders to help ensure that they are treated equitably. Whereas, in relation to the statement of comprehensive income and the statement of financial position, paragraph 11.1 only permits the recognition of imputed inflows and outflows relating to transactions with external parties, paragraph 18.3 requires all imputed inflows and outflows to be included in the disaggregated information to reflect the performance of each segment of the life insurer.

An entity need not apply the disclosure requirements in this Standard to comparative information that relates to annual periods beginning before 1 January 2005, except for the disclosures required by paragraphs 14.1.1(a) and 14.1.1(b) about accounting policies, and recognised assets, liabilities, income and expense and cash flows.

When an entity applies the disclosure requirements in this Standard to comparative information that relates to annual periods beginning before 1 January 2005, if it is impracticable to apply a particular requirement of this Standard to comparative information that relates to annual periods beginning before 1 January 2005, an entity shall disclose that fact. AASB 108 explains the term “impracticable”.

In applying paragraph 15.1.1(b)(iii), an entity need not disclose information about claims development that occurred earlier than five years before the end of the first annual reporting period in which it applies this Standard. Furthermore, if it is impracticable, when an entity first applies this Standard, to prepare information about claims development that occurred before the beginning of the earliest period for which an entity presents full comparative information that complies with this Standard, the entity shall disclose that fact.

There are also references to transitional measurement requirements in paragraphs 10.2-10.2.2, 10.5, 10.6, 10.7, 10.7.2 and 12.1.

In this Standard:

acquisition costs means the fixed and variable costs of acquiring new business, including commissions and similar distribution costs, and costs of accepting, issuing and initially recording policies

(Acquisition costs relate to the costs incurred in acquiring specific life insurance contracts during the reporting period. They do not include the general growth and development costs incurred by a life insurer.)

cedant means the policyholder under a life reinsurance contract

deposit component means a contractual component that is not accounted for as a derivative under AASB 9 Financial Instruments and would be within the scope of AASB 9 Financial Instruments if it were a separate instrument

direct insurance contract means an insurance contract that is not a reinsurance contract

discretionary participation feature means a contractual right to receive, as a supplement to guaranteed benefits, additional benefits:

fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See AASB 13.)

financial risk means the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract

general insurance contract means an insurance contract that is not a life insurance contract

guaranteed benefits means payments or other benefits to which a particular policyholder or investor has an unconditional right that is not subject to the contractual discretion of the issuer

The following terms are defined in AASB 132 Financial Instruments: Presentation and are used in this Standard with the meaning specified in AASB 132:

This Appendix gives guidance on the definition of an insurance contract in section 20 of this Standard.  It addresses the following issues:
(a)    the term ‘uncertain future event’ (paragraphs 2-4);
(b)    insurance risk and other risks (paragraphs 5-14);
(c)    examples of life insurance contracts (paragraphs 15-18);
(d)    significant insurance risk (paragraphs 19-25); and
(e)    changes in the level of insurance risk (paragraphs 26 and 27).
 

Uncertainty (or risk) is the essence of an insurance contract.  Accordingly, at least one of the following is uncertain at the inception of an insurance contract:
(a)    whether an insured event will occur;
(b)    when it will occur; or
(c)    how much the insurer will need to pay if it occurs.

In some insurance contracts, the insured event is the discovery of a loss during the term of the contract, even if the loss arises from an event that occurred before the inception of the contract.  In other insurance contracts, the insured event is an event that occurs during the term of the contract, even if the resulting loss is discovered after the end of the contract term.

Some insurance contracts cover events that have already occurred, but whose financial effect is still uncertain.  An example is a reinsurance contract that covers the direct insurer against adverse development of claims already reported by policyholders.  In such contracts, the insured event is the discovery of the ultimate cost of those claims.

The definition of an insurance contract refers to insurance risk, which this Standard defines as risk, other than financial risk, transferred from the holder of a contract to the issuer.  A contract that exposes the issuer to financial risk without significant insurance risk is not an insurance contract.

The definition of financial risk in section 20 of this Standard includes a list of financial and non-financial variables.  That list includes non-financial variables that are not specific to a party to the contract, such as an index of earthquake losses in a particular region or an index of temperatures in a particular city.  It excludes non financial variables that are specific to a party to the contract.

Some contracts expose the issuer to financial risk, in addition to significant insurance risk.  For example, many life insurance contracts both guarantee a minimum rate of return to policyholders (creating financial risk) and promise death benefits that at some times significantly exceed the policyholder’s account balance (creating insurance risk in the form of mortality risk).  Such contracts are insurance contracts.

Under some contracts, an insured event triggers the payment of an amount linked to a price index.  Such contracts are insurance contracts, provided the payment that is contingent on the insured event can be significant.  For example, a life-contingent annuity linked to a cost-of-living index transfers insurance risk because payment is triggered by an uncertain event – the survival of the annuitant.  The link to the price index is an embedded derivative, but it also transfers insurance risk.  If the resulting transfer of insurance risk is significant, the embedded derivative meets the definition of an insurance contract, in which case it need not be separated and measured at fair value (see paragraph 2.2.1 of this Standard).

The definition of insurance risk refers to risk that the insurer accepts from the policyholder.  In other words, insurance risk is a pre existing risk transferred from the policyholder to the insurer.  Thus, a new risk created by the contract is not insurance risk.

The definition of an insurance contract refers to an adverse effect on the policyholder.  The definition does not limit the payment by the insurer to an amount equal to the financial impact of the adverse event.  For example, the definition does not limit payment under a term life insurance contract to the financial loss suffered by the deceased’s dependants, nor does it preclude the payment of predetermined amounts to quantify the loss caused by death or an accident.

Some contracts require a payment if a specified uncertain event occurs, but do not require an adverse effect on the policyholder as a precondition for payment.  Such a contract is not an insurance contract even if the holder uses the contract to mitigate an underlying risk exposure.  For example, if the holder uses a derivative to hedge an underlying non-financial variable that is correlated with cash flows from an asset of the entity, the derivative is not an insurance contract because payment is not conditional on whether the holder is adversely affected by a reduction in the cash flows from the asset.  Conversely, the definition of an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment.  This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse effect, but permits the insurer to deny payment if it is not satisfied that the event caused an adverse effect.

Lapse or persistency risk (i.e. the risk that the counterparty will cancel the contract earlier or later than the issuer had expected in pricing the contract) is not insurance risk because the payment to the counterparty is not contingent on an uncertain future event that adversely affects the counterparty.  Similarly, expense risk (i.e. the risk of unexpected increases in the administrative costs associated with the servicing of a contract, rather than in costs associated with insured events) is not insurance risk because an unexpected increase in expenses does not adversely affect the counterparty.

Therefore, a contract that exposes the issuer to lapse risk, persistency risk or expense risk is not an insurance contract unless it also exposes the issuer to insurance risk.  However, if the issuer of that contract mitigates that risk by using a second contract to transfer part of that risk to another party, the second contract exposes that other party to insurance risk.

An insurer can accept significant insurance risk from the policyholder only if the insurer is an entity separate from the policyholder.  In the case of a mutual insurer, the mutual accepts risk from each policyholder and pools that risk.  Although policyholders bear that pooled risk collectively in their capacity as owners, the mutual has still accepted the risk that is the essence of an insurance contract.

The following are examples of contracts that are life insurance contracts, if the transfer of insurance risk is significant:

The following are examples of items that are not life insurance contracts:

If the contracts described in paragraph 16 of this Appendix create financial assets or financial liabilities, they are within the scope of AASB 9.  Among other things, this means that the parties to the contract use what is sometimes called deposit accounting, which involves the following:

If the contracts described in paragraph 16 of this Appendix do not create financial assets or financial liabilities, AASB 15 applies. Under AASB 15, revenue is recognised when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled.

A contract is an insurance contract only if it transfers significant insurance risk.  Paragraphs 5 to 14 of this Appendix discuss insurance risk.  The following paragraphs discuss the assessment of whether insurance risk is significant.

Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction).  If significant additional benefits would be payable in scenarios that have commercial substance, the condition in the previous sentence may be met even if the insured event is extremely unlikely or even if the expected (i.e. probability-weighted) present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows.

The additional benefits described in paragraph 20 of this Appendix refer to amounts that exceed those that would be payable if no insured event occurred (excluding scenarios that lack commercial substance).  Those additional amounts include claims handling and claims assessment costs, but exclude:

An insurer shall assess the significance of insurance risk contract by contract, rather than by reference to materiality to the financial statements ^[1].  Thus, insurance risk may be significant even if there is a minimal probability of material losses for a whole book of contracts.  This contract-by-contract assessment makes it easier to classify a contract as an insurance contract.  However, if a relatively homogeneous book of small contracts is known to consist of contracts that all transfer insurance risk, an insurer need not examine each contract within that book to identify a few non-derivative contracts that transfer insignificant insurance risk.

It follows from paragraphs 20 to 22 of this Appendix that if a contract pays a death benefit exceeding the amount payable on survival, the contract is an insurance contract unless the additional death benefit is insignificant (judged by reference to the contract rather than to an entire book of contracts).  As noted in paragraph 21(b) of this Appendix, the waiver on death of cancellation or surrender charges is not included in this assessment if this waiver does not compensate the policyholder for a pre existing risk.  Similarly, an annuity contract that pays out regular sums for the rest of a policyholder’s life is an insurance contract, unless the aggregate life contingent payments are insignificant.

Paragraph 20 of this Appendix refers to additional benefits.  These additional benefits could include a requirement to pay benefits earlier if the insured event occurs earlier and the payment is not adjusted for the time value of money.  An example is whole life insurance for a fixed amount (in other words, insurance that provides a fixed death benefit whenever the policyholder dies, with no expiry date for the cover).  It is certain that the policyholder will die, but the date of death is uncertain.  The insurer will suffer a loss on those individual contracts for which policyholders die early, even if there is no overall loss on the whole book of contracts.

If an insurance contract is unbundled into a deposit component and an insurance component, the significance of insurance risk transfer is assessed by reference to the insurance component.  The significance of insurance risk transferred by an embedded derivative is assessed by reference to the embedded derivative.

Some contracts do not transfer any insurance risk to the issuer at inception, although they do transfer insurance risk at a later time.  For example, consider a contract that provides a specified investment return and includes an option for the policyholder to use the proceeds of the investment on maturity to buy a life-contingent annuity at the current annuity rates charged by the insurer to other new annuitants when the policyholder exercises the option.  The contract transfers no insurance risk to the issuer until the option is exercised, because the insurer remains free to price the annuity on a basis that reflects the insurance risk transferred to the insurer at that time.  However, if the contract specifies the annuity rates (or a basis for setting the annuity rates), the contract transfers insurance risk to the issuer at inception.

A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire.