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Wiley lFRS: Practicallmplementation Guide and Workbook
7.3 Information that helps users understand the amount, timing, and uncertainty of future cash
flows is required . The terms and conditions of insurance contracts that have a material affect on the
amount, timing, and uncertainty of the insurer's future cash flows also have to be disclosed.
7.4 Information about the actual claims as compared with previous estimates needs disclosure,
and information about interest rate risk and credit rate risk that lAS 32 would require should be
shown.
7.5 Information about exposures to interest rate risk or market risk under embedded derivatives
contained in a host insurance contract should be shown if the insurer does not show the embedded
derivatives at fair value. However, insurers do not need to disclose the fair value of their insurance
contracts at present but need to disclose the gains and losses from purchasing reinsurance contracts.
Practical Insight
A typical insurer's balance sheet might comprise these assets and liabilities and be covered by
the following IFRS :
Assets
Investments
Property
Investments contracts
Insurance contracts
Other assets
Liabilities
Equity
Insurance liabilities
Investment contractliabilities
Other liabilities
CaseStudy2
IASIIFRS
lAS 39
lAS
16/40
lAS 18
IFRS4
vanous
lAS
32/39
IFRS4
lAS 39
vanous
Facts
Entity A writes a single policy for a $ I,000 premium and expects claims to be made of $600 in year 4.
At the time of writing the policy, there are commission costs paid of $200. Assume a discount rate of 3%
risk-free. The entity says that if a provision for risk and uncertainty were to be made , it would amount to
$250, and that this risk would expire evenly over years 2, 3, and 4. Under existing policies, the entity
would spread the net premiums, the claims expense, and the commissioning costs over the first two years
of the policy . Investment returns in years 1 and 2 are $20 and $40 respectively.
Required
Show the treatment of this policy using a deferral and matching approach in years 1 and 2 that would be
acceptable under IFRS 4.
How would the treatment differ if a "fair value" approach were used?
Solution
Deferral and Matching (IFRS 4):
Premiumearned
Claimsexpense
Commission costs
Underwriting profit
Investment return
Profit
Year I
500
(300)
(l00)
100
-.1Q
120
Year 2
500
(300)
(l00)
100
-.AQ
140
If a fair value approach were used, the whole of the premium earned would be credited in year
I.
The
expected claims would be provided for on a discounted basis and then unwound over the period to year
4. The provision for risk and uncertainty would be made in year 1 and unwound over the following three
years. Commission costs would all be charged in year I also. The investment returns would be treated
in the same way as in the deferral approach.