IFRS 4

International Financial Reporting Standard 4

Insurance Contracts
In March 2004 the International Accounting Standards Board (IASB) issued IFRS 4 Insurance
Contracts. In August 2005 the IASB amended the scope of IFRS 4 to clarify that most
financial guarantee contracts would apply the financial instruments requirements.
In December 2005 the IASB published revised guidance on implementing IFRS 4.
Other IFRSs have made minor consequential amendments to IFRS 4. They include IFRS 7
Financial Instruments: Disclosures (amendments in March 2009) and IFRS 9 Financial Instruments
(issued November 2009 and October 2010).

IFRS Foundation

A179

IFRS 4

CONTENTS
from paragraph
INTRODUCTION

IN1

INTERNATIONAL FINANCIAL REPORTING STANDARD 4

INSURANCE CONTRACTS
OBJECTIVE

SCOPE

Embedded derivatives

Unbundling of deposit components

10

RECOGNITION AND MEASUREMENT

13

Temporary exemption from some other IFRSs

13

Liability adequacy test

Impairment of reinsurance assets

15
20

Changes in accounting policies

21

Current market interest rates

Continuation of existing practices
Prudence
Future investment margins
Shadow accounting

24
25
26
27
30

Insurance contracts acquired in a business combination or portfolio transfer

31

Discretionary participation features

34

Discretionary participation features in insurance contracts

Discretionary participation features in financial instruments

34
35

DISCLOSURE

36

Explanation of recognised amounts

36

Nature and extent of risks arising from insurance contracts

38

EFFECTIVE DATE AND TRANSITION

40

Disclosure

42

Redesignation of financial assets

45

APPENDICES
A

Defined terms

Definition of an insurance contract

Amendments to other IFRSs

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS EDITION
APPROVAL BY THE BOARD OF IFRS 4 ISSUED IN MARCH 2004
APPROVAL BY THE BOARD OF FINANCIAL GUARANTEE CONTRACTS
(AMENDMENTS TO IAS 39 AND IFRS 4) ISSUED IN AUGUST 2005
BASIS FOR CONCLUSIONS
DISSENTING OPINIONS
IMPLEMENTATION GUIDANCE

A180

IFRS Foundation

IFRS 4

International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) is set out in

paragraphs 145 and Appendices AC. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the Standard. Definitions of other terms are given
in the Glossary for International Financial Reporting Standards. IFRS 4 should be
read in the context of its objective and the Basis for Conclusions, the Preface to
International Financial Reporting Standards and the Conceptual Framework for Financial
Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance.

IFRS Foundation

A181

IFRS 4

Introduction
Reasons for issuing the IFRS
IN1

This is the first IFRS to deal with insurance contracts. Accounting practices for
insurance contracts have been diverse, and have often differed from practices in
other sectors. Because many entities will adopt IFRSs in 2005, the International
Accounting Standards Board has issued this IFRS:

IN2

(a)

to make limited improvements to accounting for insurance contracts until

the Board completes the second phase of its project on insurance contracts.

(b)

to require any entity issuing insurance contracts (an insurer) to disclose

information about those contracts.

This IFRS is a stepping stone to phase II of this project. The Board is committed to
completing phase II without delay once it has investigated all relevant conceptual
and practical questions and completed its full due process.

Main features of the IFRS

IN3

The IFRS applies to all insurance contracts (including reinsurance contracts) that
an entity issues and to reinsurance contracts that it holds, except for specified
contracts covered by other IFRSs. It does not apply to other assets and liabilities
of an insurer, such as financial assets and financial liabilities within the scope of
IFRS 9 Financial Instruments. Furthermore, it does not address accounting by
policyholders.

IN4

The IFRS exempts an insurer temporarily (ie during phase I of this project) from
some requirements of other IFRSs, including the requirement to consider the
Framework1 in selecting accounting policies for insurance contracts. However,
the IFRS:

IN5

(a)

prohibits provisions for possible claims under contracts that are not in
existence at the end of the reporting period (such as catastrophe and
equalisation provisions).

(b)

requires a test for the adequacy of recognised insurance liabilities and an

impairment test for reinsurance assets.

(c)

requires an insurer to keep insurance liabilities in its statement of

financial position until they are discharged or cancelled, or expire, and to
present insurance liabilities without offsetting them against related
reinsurance assets.

The IFRS permits an insurer to change its accounting policies for insurance
contracts only if, as a result, its financial statements present information that is
more relevant and no less reliable, or more reliable and no less relevant.
In particular, an insurer cannot introduce any of the following practices,
although it may continue using accounting policies that involve them:
The reference to the Framework is to IASC's Framework for the Preparation and Presentation of Financial
Statements, adopted by the IASB in 2001. In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting.

A182

IFRS Foundation

IFRS 4

(a)

measuring insurance liabilities on an undiscounted basis.

(b)

measuring contractual rights to future investment management fees at an

amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services.

(c)

using non-uniform accounting policies for the insurance liabilities of

subsidiaries.

IN6

The IFRS permits the introduction of an accounting policy that involves

remeasuring designated insurance liabilities consistently in each period to reflect
current market interest rates (and, if the insurer so elects, other current estimates
and assumptions). Without this permission, an insurer would have been required
to apply the change in accounting policies consistently to all similar liabilities.

IN7

An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence. However, if an insurer already measures its
insurance contracts with sufficient prudence, it should not introduce additional
prudence.

IN8

There is a rebuttable presumption that an insurers financial statements will

become less relevant and reliable if it introduces an accounting policy that
reflects future investment margins in the measurement of insurance contracts.

IN9

When an insurer changes its accounting policies for insurance liabilities, it may
reclassify some or all financial assets as at fair value through profit or loss.

IN10

The IFRS:

IN11

IN12

(a)

clarifies that an insurer need not account for an embedded derivative

separately at fair value if the embedded derivative meets the definition of
an insurance contract.

(b)

requires an insurer to unbundle (ie account separately for) deposit

components of some insurance contracts, to avoid the omission of assets
and liabilities from its statement of financial position.

(c)

clarifies the applicability of the practice sometimes known as shadow

accounting.

(d)

permits an expanded presentation for insurance contracts acquired in a

business combination or portfolio transfer.

(e)

addresses limited aspects of discretionary participation features contained

in insurance contracts or financial instruments.

The IFRS requires disclosure to help users understand:

(a)

the amounts in the insurers financial statements that arise from insurance
contracts.

(b)

the nature and extent of risks arising from insurance contracts.

[Deleted]

Potential impact of future proposals

IN13

[Deleted]

IFRS Foundation

A183

IFRS 4

International Financial Reporting Standard 4

Insurance Contracts
Objective
1

The objective of this IFRS is to specify the financial reporting for insurance contracts by
any entity that issues such contracts (described in this IFRS as an insurer) until the
Board completes the second phase of its project on insurance contracts. In particular,
this IFRS requires:
(a)

limited improvements to accounting by insurers for insurance contracts.

(b)

disclosure that identifies and explains the amounts in an insurers

financial statements arising from insurance contracts and helps users of
those financial statements understand the amount, timing and
uncertainty of future cash flows from insurance contracts.

Scope
2

An entity shall apply this IFRS to:

(a)

insurance contracts (including reinsurance contracts) that it issues and

reinsurance contracts that it holds.

(b)

financial instruments that it issues with a discretionary participation feature

(see paragraph 35). IFRS 7 Financial Instruments: Disclosures requires disclosure
about financial instruments, including financial instruments that contain
such features.

This IFRS does not address other aspects of accounting by insurers, such as
accounting for financial assets held by insurers and financial liabilities issued by
insurers (see IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments:
Recognition and Measurement, IFRS 7 and IFRS 9 Financial Instruments), except in the
transitional provisions in paragraph 45.

An entity shall not apply this IFRS to:

A184

(a)

product warranties issued directly by a manufacturer, dealer or retailer (see

IAS 18 Revenue and IAS 37 Provisions, Contingent Liabilities and Contingent Assets).

(b)

employers assets and liabilities under employee benefit plans (see IAS 19
Employee Benefits and IFRS 2 Share-based Payment) and retirement benefit
obligations reported by defined benefit retirement plans (see IAS 26
Accounting and Reporting by Retirement Benefit Plans).

(c)

contractual rights or contractual obligations that are contingent on the

future use of, or right to use, a non-financial item (for example, some
licence fees, royalties, contingent lease payments and similar items), as
well as a lessees residual value guarantee embedded in a finance lease
(see IAS 17 Leases, IAS 18 Revenue and IAS 38 Intangible Assets).

(d)

financial guarantee contracts unless the issuer has previously asserted

explicitly that it regards such contracts as insurance contracts and has used

IFRS Foundation

IFRS 4

accounting applicable to insurance contracts, in which case the issuer may

elect to apply either IAS 32, IFRS 7 and IFRS 9 or this IFRS to such financial
guarantee contracts. The issuer may make that election contract by
contract, but the election for each contract is irrevocable.
(e)

contingent consideration payable or receivable in a business combination

(see IFRS 3 Business Combinations).

(f)

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

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

A reinsurance contract is a type of insurance contract. Accordingly, all references

in this IFRS to insurance contracts also apply to reinsurance contracts.

Embedded derivatives
7

IFRS 9 requires an entity to separate some embedded derivatives from their host
contract, measure them at fair value and include changes in their fair value in
profit or loss. IFRS 9 applies to derivatives embedded in an insurance contract
unless the embedded derivative is itself an insurance contract.

As an exception to the requirements in IFRS 9, an insurer need not separate, and

measure at fair value, a policyholders 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 requirements in IFRS 9 do apply 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, those requirements also apply if the holders
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 8 applies equally to options to surrender a financial instrument

containing a discretionary participation feature.

Unbundling of deposit components

10

Some 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 (ie without considering the
insurance component).

IFRS Foundation

A185

IFRS 4

(ii)

the insurers 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 (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 (a)(i).

11

The following is an example of a case when an insurers 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 cedants accounting policies would otherwise permit it
to recognise the compensation as income without recognising the resulting
obligation, unbundling is required.

12

To unbundle a contract, an insurer shall:

(a)

apply this IFRS to the insurance component.

(b)

apply IFRS 9 to the deposit component.

Recognition and measurement

Temporary exemption from some other IFRSs
13

14

A186

Paragraphs 1012 of IAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors specify criteria for an entity to use in developing an accounting policy if no
IFRS applies specifically to an item. However, this IFRS exempts an insurer from
applying those criteria to its accounting policies for:
(a)

insurance contracts that it issues (including related acquisition costs and

related intangible assets, such as those described in paragraphs 31 and 32);
and

(b)

reinsurance contracts that it holds.

Nevertheless, this IFRS does not exempt an insurer from some implications of the
criteria in paragraphs 1012 of IAS 8. Specifically, an insurer:
(a)

shall not recognise as a liability any provisions for possible future claims, if
those claims arise under insurance contracts that are not in existence at
the end of the reporting period (such as catastrophe provisions and
equalisation provisions).

(b)

shall carry out the liability adequacy test described in paragraphs 1519.

(c)

shall remove an insurance liability (or a part of an insurance liability) from

its statement of financial position when, and only when, it is
extinguishedie when the obligation specified in the contract is
discharged or cancelled or expires.

IFRS Foundation

IFRS 4

(d)

(e)

shall not offset:

(i)

reinsurance assets against the related insurance liabilities; or

(ii)

income or expense from reinsurance contracts against the expense or

income from the related insurance contracts.

shall consider whether its reinsurance assets are impaired (see paragraph 20).

Liability adequacy test

15

An insurer shall assess at the end of each reporting period whether its recognised
insurance liabilities are adequate, using current estimates of future cash flows
under its insurance contracts. If that assessment shows that the carrying amount
of its insurance liabilities (less related deferred acquisition costs and related
intangible assets, such as those discussed in paragraphs 31 and 32) is inadequate
in the light of the estimated future cash flows, the entire deficiency shall be
recognised in profit or loss.

16

If an insurer applies a liability adequacy test that meets specified

minimum requirements, this IFRS imposes no further requirements. The minimum
requirements are the following:

17

(a)

The test considers current estimates of all contractual cash flows, and of
related cash flows such as claims handling costs, as well as cash flows
resulting from embedded options and guarantees.

(b)

If the test shows that the liability is inadequate, the entire deficiency is
recognised in profit or loss.

If an insurers accounting policies do not require a liability adequacy test that

meets the minimum requirements of paragraph 16, the insurer shall:
(a)

(b)

determine the carrying amount of the relevant insurance liabilities2 less

the carrying amount of:
(i)

any related deferred acquisition costs; and

(ii)

any related intangible assets, such as those acquired in a business

combination or portfolio transfer (see paragraphs 31 and 32).
However, related reinsurance assets are not considered because an
insurer accounts for them separately (see paragraph 20).

determine whether the amount described in (a) is less than the carrying
amount that would be required if the relevant insurance liabilities were
within the scope of IAS 37. If it is less, the insurer shall recognise the entire
difference in profit or loss and decrease the carrying amount of the related
deferred acquisition costs or related intangible assets or increase the
carrying amount of the relevant insurance liabilities.

The relevant insurance liabilities are those insurance liabilities (and related deferred acquisition
costs and related intangible assets) for which the insurers accounting policies do not require a
liability adequacy test that meets the minimum requirements of paragraph 16.

IFRS Foundation

A187

IFRS 4

18

If an insurers liability adequacy test meets the minimum requirements of

paragraph 16, the test is applied at the level of aggregation specified in that test.
If its liability adequacy test does not meet those minimum requirements, the
comparison described in paragraph 17 shall be made at the level of a portfolio of
contracts that are subject to broadly similar risks and managed together as a
single portfolio.

19

The amount described in paragraph 17(b) (ie the result of applying IAS 37) shall
reflect future investment margins (see paragraphs 2729) if, and only if, the
amount described in paragraph 17(a) also reflects those margins.

Impairment of reinsurance assets

20

If a cedants reinsurance asset is impaired, the cedant shall reduce its

carrying amount accordingly and recognise that impairment loss in profit or
loss. A reinsurance asset is impaired if, and only if:
(a)

there is objective evidence, as a result of an event that occurred after initial

recognition of the reinsurance asset, that the cedant may not receive all
amounts due to it under the terms of the contract; and

(b)

that event has a reliably measurable impact on the amounts that the
cedant will receive from the reinsurer.

Changes in accounting policies

21

Paragraphs 2230 apply both to changes made by an insurer that already applies
IFRSs and to changes made by an insurer adopting IFRSs for the first time.

22

An insurer may change its accounting policies for insurance contracts if, and only
if, the change makes the financial statements more relevant to the economic
decision-making needs of users and no less reliable, or more reliable and no less
relevant to those needs. An insurer shall judge relevance and reliability by the
criteria in IAS 8.

23

To justify changing its accounting policies for insurance contracts, an insurer

shall show that the change brings its financial statements closer to meeting the
criteria in IAS 8, but the change need not achieve full compliance with those
criteria. The following specific issues are discussed below:

A188

(a)

current interest rates (paragraph 24);

(b)

continuation of existing practices (paragraph 25);

(c)

prudence (paragraph 26);

(d)

future investment margins (paragraphs 2729); and

(e)

shadow accounting (paragraph 30).

IFRS Foundation

IFRS 4

Current market interest rates

24

An insurer is permitted, but not required, to change its accounting policies so

that it remeasures designated insurance liabilities3 to reflect current market
interest rates and recognises changes in those liabilities in profit or loss. At that
time, it may also introduce accounting policies that require other current
estimates and assumptions for the designated liabilities. The election in this
paragraph permits an insurer to change its accounting policies for designated
liabilities, without applying those policies consistently to all similar liabilities as
IAS 8 would otherwise require. If an insurer designates liabilities for this election,
it shall continue to apply current market interest rates (and, if applicable, the
other current estimates and assumptions) consistently in all periods to all these
liabilities until they are extinguished.

Continuation of existing practices

25

An insurer may continue the following practices, but the introduction of any of
them does not satisfy paragraph 22:
(a)

measuring insurance liabilities on an undiscounted basis.

(b)

measuring contractual rights to future investment management fees at an

amount that exceeds their fair value as implied by a comparison with
current fees charged by other market participants for similar services. It is
likely that the fair value at inception of those contractual rights equals the
origination costs paid, unless future investment management fees and
related costs are out of line with market comparables.

(c)

using non-uniform accounting policies for the insurance contracts (and

related deferred acquisition costs and related intangible assets, if any) of
subsidiaries, except as permitted by paragraph 24. If those accounting
policies are not uniform, an insurer may change them if the change does
not make the accounting policies more diverse and also satisfies the other
requirements in this IFRS.

Prudence
26

An insurer need not change its accounting policies for insurance contracts to
eliminate excessive prudence. However, if an insurer already measures its
insurance contracts with sufficient prudence, it shall not introduce additional
prudence.

Future investment margins

27

An insurer need not change its accounting policies for insurance contracts to
eliminate future investment margins.
However, there is a rebuttable
presumption that an insurers financial statements will become less relevant and
reliable if it introduces an accounting policy that reflects future investment

In this paragraph, insurance liabilities include related deferred acquisition costs and related
intangible assets, such as those discussed in paragraphs 31 and 32.

IFRS Foundation

A189

IFRS 4

margins in the measurement of insurance contracts, unless those margins affect

the contractual payments. Two examples of accounting policies that reflect those
margins are:

28

29

(a)

using a discount rate that reflects the estimated return on the insurers
assets; or

(b)

projecting the returns on those assets at an estimated rate of return,

discounting those projected returns at a different rate and including the
result in the measurement of the liability.

An insurer may overcome the rebuttable presumption described in paragraph 27

if, and only if, the other components of a change in accounting policies increase
the relevance and reliability of its financial statements sufficiently to outweigh
the decrease in relevance and reliability caused by the inclusion of future
investment margins. For example, suppose that an insurers existing accounting
policies for insurance contracts involve excessively prudent assumptions set at
inception and a discount rate prescribed by a regulator without direct reference
to market conditions, and ignore some embedded options and guarantees.
The insurer might make its financial statements more relevant and no less
reliable by switching to a comprehensive investor-oriented basis of accounting
that is widely used and involves:
(a)

current estimates and assumptions;

(b)

a reasonable (but not excessively prudent) adjustment to reflect risk and

uncertainty;

(c)

measurements that reflect both the intrinsic value and time value of
embedded options and guarantees; and

(d)

a current market discount rate, even if that discount rate reflects the
estimated return on the insurers assets.

In some measurement approaches, the discount rate is used to determine the

present value of a future profit margin. That profit margin is then attributed to
different periods using a formula. In those approaches, the discount rate affects
the measurement of the liability only indirectly. In particular, the use of a less
appropriate discount rate has a limited or no effect on the measurement of the
liability at inception. However, in other approaches, the discount rate determines
the measurement of the liability directly. In the latter case, because the
introduction of an asset-based discount rate has a more significant effect, it is
highly unlikely that an insurer could overcome the rebuttable presumption
described in paragraph 27.

Shadow accounting
30

A190

In some accounting models, realised gains or losses on an insurers assets have a

direct effect on the measurement of some or all of (a) its insurance liabilities, (b)
related deferred acquisition costs and (c) related intangible assets, such as those
described in paragraphs 31 and 32. An insurer is permitted, but not required, to
change its accounting policies so that a recognised but unrealised gain or loss on
an asset affects those measurements in the same way that a realised gain or loss

IFRS Foundation

IFRS 4

does. The related adjustment to the insurance liability (or deferred acquisition
costs or intangible assets) shall be recognised in other comprehensive income if,
and only if, the unrealised gains or losses are recognised in other comprehensive
income. This practice is sometimes described as shadow accounting.

Insurance contracts acquired in a business combination or

portfolio transfer
31

To comply with IFRS 3, 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:
(a)

a liability measured in accordance with the insurers accounting policies

for insurance contracts that it issues; and

(b)

an intangible asset, representing the difference between (i) the fair value of
the contractual insurance rights acquired and insurance obligations
assumed and (ii) the amount described in (a).
The subsequent
measurement of this asset shall be consistent with the measurement of the
related insurance liability.

32

An insurer acquiring a portfolio of insurance contracts may use the expanded

presentation described in paragraph 31.

33

The intangible assets described in paragraphs 31 and 32 are excluded from the
scope of IAS 36 Impairment of Assets and IAS 38. However, IAS 36 and IAS 38 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.

Discretionary participation features

Discretionary participation features in insurance contracts
34

Some insurance contracts contain a discretionary participation feature as well as

a guaranteed element. 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 shall classify the whole contract as a liability. If the issuer
classifies them separately, it shall classify 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 IFRS 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.

IFRS Foundation

A191

IFRS 4

(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 or
all of the 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 non-controlling 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 IAS 1 Presentation of Financial
Statements).

(d)

shall, if the contract contains an embedded derivative within the scope of

IFRS 9, apply IFRS 9 to that embedded derivative.

(e)

shall, in all respects not described in paragraphs 1420 and 34(a)(d),

continue its existing accounting policies for such contracts, unless it
changes those accounting policies in a way that complies with paragraphs
2130.

Discretionary participation features in financial instruments

35

A192

The requirements in paragraph 34 also apply to a financial instrument 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 paragraphs 1519 to the
whole contract (ie both the guaranteed element and the discretionary
participation feature). The issuer need not determine the amount that
would result from applying IFRS 9 to the guaranteed element.

(b)

if the issuer classifies part or all of that 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 IFRS 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 9
exempts that option from measurement at fair value. The issuer need not
disclose the amount that would result from applying IFRS 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.

(d)

although these contracts are financial instruments, an issuer applying

paragraph 20(b) of IFRS 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.

IFRS Foundation

IFRS 4

Disclosure
Explanation of recognised amounts
36

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

37

To comply with paragraph 36, an insurer shall disclose:

(a)

its accounting policies for insurance contracts and related assets,

liabilities, income and expense.

(b)

the recognised assets, liabilities, income and expense (and, if it presents its
statement of cash flows using the direct method, cash flows) arising from
insurance contracts. Furthermore, if the insurer is a cedant, it shall
disclose:
(i)

gains and losses recognised in profit or loss on buying reinsurance;

and

(ii)

if the cedant defers and amortises gains and losses arising on buying
reinsurance, the amortisation for the period and the amounts
remaining unamortised at the beginning and end of the period.

(c)

the process used to determine the assumptions that have the greatest effect
on the measurement of the recognised amounts described in (b). When
practicable, an insurer shall also give quantified disclosure of those
assumptions.

(d)

the effect of changes in assumptions used to measure insurance assets and

insurance liabilities, showing separately the effect of each change that has
a material effect on the financial statements.

(e)

reconciliations of changes in insurance liabilities, reinsurance assets and, if

any, related deferred acquisition costs.

Nature and extent of risks arising from insurance contracts

38

An insurer shall disclose information that enables users of its financial

statements to evaluate the nature and extent of risks arising from insurance
contracts.

39

To comply with paragraph 38, an insurer shall disclose:

(a)

its objectives, policies and processes for managing risks arising from
insurance contracts and the methods used to manage those risks.

(b)

[deleted]

(c)

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

sensitivity to insurance risk (see paragraph 39A).

(ii)

concentrations of insurance risk, including a description of how

management determines concentrations and a description of the
shared characteristic that identifies each concentration (eg type of
insured event, geographical area, or currency).

IFRS Foundation

A193

IFRS 4

(iii)

(d)

(e)

39A

actual claims compared with previous estimates (ie 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. An 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.

information about credit risk, liquidity risk and market risk that
paragraphs 3142 of IFRS 7 would require if the insurance contracts were
within the scope of IFRS 7. However:
(i)

an insurer need not provide the maturity analyses required by

paragraph 39(a) and (b) of IFRS 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.

(ii)

if an 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
IFRS 7. Such an insurer shall also provide the disclosures required by
paragraph 41 of IFRS 7.

information about exposures to market risk arising from embedded

derivatives contained in a host insurance contract if the insurer is not
required to, and does not, measure the embedded derivatives at fair value.

To comply with paragraph 39(c)(i), an 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 if changes in the relevant risk variable that were reasonably
possible at the end of the reporting period had 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 an 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 IFRS 7.

(b)

qualitative information about sensitivity, and information about those

terms and conditions of insurance contracts that have a material effect on
the amount, timing and uncertainty of the insurers future cash flows.

Effective date and transition

40

A194

The transitional provisions in paragraphs 4145 apply both to an entity that is

already applying IFRSs when it first applies this IFRS and to an entity that applies
IFRSs for the first time (a first-time adopter).

IFRS Foundation

IFRS 4

41

An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies this IFRS
for an earlier period, it shall disclose that fact.

41A

Financial Guarantee Contracts (Amendments to IAS 39 and IFRS 4), issued in

August 2005, amended paragraphs 4(d), B18(g) and B19(f). An entity shall apply
those amendments for annual periods beginning on or after 1 January 2006.
Earlier application is encouraged. If an entity applies those amendments for an
earlier period, it shall disclose that fact and apply the related amendments to
IAS 39 and IAS 324 at the same time.

41B

IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs.
In addition it amended paragraph 30. An entity shall apply those amendments
for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1
(revised 2007) for an earlier period, the amendments shall be applied for that
earlier period.

41C

[Deleted]

41D

IFRS 9, issued in October 2010, amended paragraphs 3, 4(d), 7, 8, 12, 34(d), 35, 45
and B18B20 and Appendix A and deleted paragraph 41C. An entity shall apply
those amendments when it applies IFRS 9 as issued in October 2010.

41E

IFRS 13 Fair Value Measurement, issued in May 2011, amended the definition of fair
value in Appendix A. An entity shall apply that amendment when it applies
IFRS 13.

Disclosure
42

An entity need not apply the disclosure requirements in this IFRS to comparative
information that relates to annual periods beginning before 1 January 2005,
except for the disclosures required by paragraph 37(a) and (b) about accounting
policies, and recognised assets, liabilities, income and expense (and cash flows if
the direct method is used).

43

If it is impracticable to apply a particular requirement of paragraphs 1035 to

comparative information that relates to annual periods beginning before
1 January 2005, an entity shall disclose that fact. Applying the liability adequacy
test (paragraphs 1519) to such comparative information might sometimes be
impracticable, but it is highly unlikely to be impracticable to apply other
requirements of paragraphs 1035 to such comparative information. IAS 8
explains the term impracticable.

44

In applying paragraph 39(c)(iii), an entity need not disclose information about

claims development that occurred earlier than five years before the end of the
first financial year in which it applies this IFRS. Furthermore, if it is
impracticable, when an entity first applies this IFRS, 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 IFRS, the entity shall disclose that fact.

When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.

IFRS Foundation

A195

IFRS 4

Redesignation of financial assets

45

A196

Notwithstanding paragraph 4.4.1 of IFRS 9, when an insurer changes its

accounting policies for insurance liabilities, it is permitted, but not required, to
reclassify some or all of its financial assets so that they are measured at fair
value. This reclassification is permitted if an insurer changes accounting
policies when it first applies this IFRS and if it makes a subsequent policy change
permitted by paragraph 22. The reclassification is a change in accounting policy
and IAS 8 applies.

IFRS Foundation

IFRS 4

Appendix A
Defined terms
This appendix is an integral part of the IFRS.

cedant

The policyholder under a reinsurance contract.

deposit component

A contractual component that is not accounted for as a derivative

under IFRS 9 and would be within the scope of IFRS 9 if it were a
separate instrument.

direct insurance
contract

An insurance contract that is not a reinsurance contract.

discretionary
participation
feature

A contractual right to receive, as a supplement to

benefits, additional benefits:

fair value

guaranteed

(a)

that are likely to be a significant portion of the total

contractual benefits;

(b)

whose amount or timing is contractually at the discretion of

the issuer; and

(c)

that are contractually based on:

(i)

the performance of a specified pool of contracts or a

specified type of contract;

(ii)

realised and/or unrealised investment returns on a

specified pool of assets held by the issuer; or

(iii)

the profit or loss of the company, fund or other entity

that issues the contract.

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 IFRS 13.)

financial guarantee A contract that requires the issuer to make specified payments to
contract
reimburse the holder for a loss it incurs because a specified debtor
fails to make payment when due in accordance with the original or
modified terms of a debt instrument.
financial risk

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, 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.

guaranteed benefits 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.

IFRS Foundation

A197

IFRS 4

guaranteed element An obligation to pay guaranteed benefits, included in a contract that

contains a discretionary participation feature.
insurance asset

An insurers net contractual rights under an insurance contract.

insurance contract

A contract under which one party (the insurer) accepts significant

insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (the
insured event) adversely affects the policyholder. (See Appendix B for
guidance on this definition.)

insurance liability

An insurers net contractual obligations under an insurance

contract.

insurance risk

Risk, other than financial risk, transferred from the holder of a

contract to the issuer.

insured event

An uncertain future event that is covered by an insurance contract

and creates insurance risk.

insurer

The party that has an obligation under an insurance contract to

compensate a policyholder if an insured event occurs.

liability adequacy
test

An assessment of whether the carrying amount of an insurance

liability needs to be increased (or the carrying amount of related
deferred acquisition costs or related intangible assets decreased),
based on a review of future cash flows.

policyholder

A party that has a right to compensation under an insurance contract

if an insured event occurs.

reinsurance assets

A cedants net contractual rights under a reinsurance contract.

reinsurance contract An insurance contract issued by one insurer (the reinsurer) to

compensate another insurer (the cedant) for losses on one or more
contracts issued by the cedant.
reinsurer

The party that has an obligation under a reinsurance contract to

compensate a cedant if an insured event occurs.

unbundle

Account for the components of a contract as if they were separate

contracts.

A198

IFRS Foundation

IFRS 4

Appendix B
Definition of an insurance contract
This appendix is an integral part of the IFRS.
B1

This appendix gives guidance on the definition of an insurance contract in

Appendix A. It addresses the following issues:
(a)

the term uncertain future event (paragraphs B2B4);

(b)

payments in kind (paragraphs B5B7);

(c)

insurance risk and other risks (paragraphs B8B17);

(d)

examples of insurance contracts (paragraphs B18B21);

(e)

significant insurance risk (paragraphs B22B28); and

(f)

changes in the level of insurance risk (paragraphs B29 and B30).

Uncertain future event

B2

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.

B3

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.

B4

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.

Payments in kind
B5

Some insurance contracts require or permit payments to be made in kind.

An example is when the insurer replaces a stolen article directly, instead of
reimbursing the policyholder. Another example is when an insurer uses its own
hospitals and medical staff to provide medical services covered by the contracts.

B6

Some fixed-fee service contracts in which the level of service depends on an

uncertain event meet the definition of an insurance contract in this IFRS but are
not regulated as insurance contracts in some countries. One example is a
maintenance contract in which the service provider agrees to repair specified
equipment after a malfunction. The fixed service fee is based on the expected
number of malfunctions, but it is uncertain whether a particular machine will

IFRS Foundation

A199

IFRS 4

break down. The malfunction of the equipment adversely affects its owner and the
contract compensates the owner (in kind, rather than cash). Another example is
a contract for car breakdown services in which the provider agrees, for a fixed
annual fee, to provide roadside assistance or tow the car to a nearby garage.
The latter contract could meet the definition of an insurance contract even if the
provider does not agree to carry out repairs or replace parts.
B7

Applying the IFRS to the contracts described in paragraph B6 is likely to be no

more burdensome than applying the IFRSs that would be applicable if such
contracts were outside the scope of this IFRS:
(a)

There are unlikely to be material liabilities for malfunctions and

breakdowns that have already occurred.

(b)

If IAS 18 Revenue applied, the service provider would recognise revenue by

reference to the stage of completion (and subject to other specified
criteria). That approach is also acceptable under this IFRS, which permits
the service provider (i) to continue its existing accounting policies for these
contracts unless they involve practices prohibited by paragraph 14 and
(ii) to improve its accounting policies if so permitted by paragraphs 2230.

(c)

The service provider considers whether the cost of meeting its contractual
obligation to provide services exceeds the revenue received in advance. To do
this, it applies the liability adequacy test described in paragraphs 1519 of
this IFRS. If this IFRS did not apply to these contracts, the service provider
would apply IAS 37 to determine whether the contracts are onerous.

(d)

For these contracts, the disclosure requirements in this IFRS are unlikely to
add significantly to disclosures required by other IFRSs.

Distinction between insurance risk and other risks

B8

The definition of an insurance contract refers to insurance risk, which this IFRS
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.

B9

The definition of financial risk in Appendix A 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, such as the
occurrence or non-occurrence of a fire that damages or destroys an asset of that
party. Furthermore, the risk of changes in the fair value of a non-financial asset
is not a financial risk if the fair value reflects not only changes in market prices
for such assets (a financial variable) but also the condition of a specific
non-financial asset held by a party to a contract (a non-financial variable).
For example, if a guarantee of the residual value of a specific car exposes the
guarantor to the risk of changes in the cars physical condition, that risk is
insurance risk, not financial risk.

A200

IFRS Foundation

IFRS 4

B10

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 policyholders account
balance (creating insurance risk in the form of mortality risk). Such contracts are
insurance contracts.

B11

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 eventthe 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 7 of this IFRS).

B12

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.

B13

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 exclude new-for-old coverage that pays the policyholder
sufficient to permit replacement of a damaged old asset by a new asset. Similarly,
the definition does not limit payment under a term life insurance contract to the
financial loss suffered by the deceaseds dependants, nor does it preclude
the payment of predetermined amounts to quantify the loss caused by death or
an accident.

B14

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.

B15

Lapse or persistency risk (ie 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

IFRS Foundation

A201

IFRS 4

risk (ie 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.
B16

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.

B17

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.

Examples of insurance contracts

B18

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

insurance against theft or damage to property.

(b)

insurance against product liability, professional liability, civil liability or

legal expenses.

(c)

life insurance and prepaid funeral plans (although death is certain, it is

uncertain when death will occur or, for some types of life insurance,
whether death will occur within the period covered by the insurance).

(d)

life-contingent annuities and pensions (ie contracts that provide

compensation for the uncertain future eventthe survival of the annuitant
or pensionerto assist the annuitant or pensioner in maintaining a given
standard of living, which would otherwise be adversely affected by his or
her survival).

(e)

disability and medical cover.

(f)

surety bonds, fidelity bonds, performance bonds and bid bonds

(ie contracts that provide compensation if another party fails to perform a
contractual obligation, for example an obligation to construct a building).

(g)

credit insurance that provides for specified payments to be made to

reimburse the holder for a loss it incurs because a specified debtor fails
to make payment when due under the original or modified terms of a
debt instrument. These contracts could have various legal forms, such as
that of a guarantee, some types of letter of credit, a credit derivative
default contract or an insurance contract. However, although these
contracts meet the definition of an insurance contract, they also meet the
definition of a financial guarantee contract in IFRS 9 and are within
the scope of IAS 325 and IFRS 9, not this IFRS (see paragraph 4(d)).

When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.

A202

IFRS Foundation

IFRS 4

Nevertheless, if an issuer of financial guarantee contracts has previously

asserted explicitly that it regards such contracts as insurance contracts
and has used accounting applicable to insurance contracts, the issuer
may elect to apply either IAS 326 and IFRS 9 or this IFRS to such financial
guarantee contracts.

B19

(h)

product warranties. Product warranties issued by another party for goods

sold by a manufacturer, dealer or retailer are within the scope of this IFRS.
However, product warranties issued directly by a manufacturer, dealer or
retailer are outside its scope, because they are within the scope of IAS 18
and IAS 37.

(i)

title insurance (ie insurance against the discovery of defects in title to land
that were not apparent when the insurance contract was written). In this
case, the insured event is the discovery of a defect in the title, not the defect
itself.

(j)

travel assistance (ie compensation in cash or in kind to policyholders for

losses suffered while they are travelling). Paragraphs B6 and B7 discuss
some contracts of this kind.

(k)

catastrophe bonds that provide for reduced payments of principal, interest

or both if a specified event adversely affects the issuer of the bond (unless
the specified event does not create significant insurance risk, for example if
the event is a change in an interest rate or foreign exchange rate).

(l)

insurance swaps and other contracts that require a payment based on

changes in climatic, geological or other physical variables that are specific
to a party to the contract.

(m)

reinsurance contracts.

The following are examples of items that are not insurance contracts:
(a)

investment contracts that have the legal form of an insurance contract but
do not expose the insurer to significant insurance risk, for example life
insurance contracts in which the insurer bears no significant mortality risk
(such contracts are non-insurance financial instruments or service
contracts, see paragraphs B20 and B21).

(b)

contracts that have the legal form of insurance, but pass all significant
insurance risk back to the policyholder through non-cancellable and
enforceable mechanisms that adjust future payments by the policyholder
as a direct result of insured losses, for example some financial reinsurance
contracts or some group contracts (such contracts are normally
non-insurance financial instruments or service contracts, see paragraphs
B20 and B21).

(c)

self-insurance, in other words retaining a risk that could have been covered
by insurance (there is no insurance contract because there is no agreement
with another party).

When an entity applies IFRS 7, the reference to IAS 32 is replaced by a reference to IFRS 7.

IFRS Foundation

A203

IFRS 4

B20

B21

(d)

contracts (such as gambling contracts) that require a payment if a specified

uncertain future event occurs, but do not require, as a contractual
precondition for payment, that the event adversely affects the policyholder.
However, this does not preclude the specification of a predetermined
payout to quantify the loss caused by a specified event such as death or an
accident (see also paragraph B13).

(e)

derivatives that expose one party to financial risk but not insurance risk,
because they require that party to make payment based solely on changes
in one or more of a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or rates, 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 (see IFRS 9).

(f)

a credit-related guarantee (or letter of credit, credit derivative default

contract or credit insurance contract) that requires payments even if the
holder has not incurred a loss on the failure of the debtor to make
payments when due (see IFRS 9).

(g)

contracts that require a payment based on a climatic, geological or other

physical variable that is not specific to a party to the contract (commonly
described as weather derivatives).

(h)

catastrophe bonds that provide for reduced payments of principal, interest

or both, based on a climatic, geological or other physical variable that is
not specific to a party to the contract.

If the contracts described in paragraph B19 create financial assets or financial

liabilities, they are within the scope of IFRS 9. Among other things, this means
that the parties to the contract use what is sometimes called deposit accounting,
which involves the following:
(a)

one party recognises the consideration received as a financial liability,

rather than as revenue.

(b)

the other party recognises the consideration paid as a financial asset,

rather than as an expense.

If the contracts described in paragraph B19 do not create financial assets or

financial liabilities, IAS 18 applies. Under IAS 18, revenue associated with a
transaction involving the rendering of services is recognised by reference to the
stage of completion of the transaction if the outcome of the transaction can be
estimated reliably.

Significant insurance risk

B22

A contract is an insurance contract only if it transfers significant insurance risk.

Paragraphs B8B21 discuss insurance risk. The following paragraphs discuss the
assessment of whether insurance risk is significant.

B23

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 (ie have no discernible effect on the economics of
the transaction). If significant additional benefits would be payable in scenarios

A204

IFRS Foundation

IFRS 4

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
(ie probability-weighted) present value of contingent cash flows is a small
proportion of the expected present value of all the remaining contractual
cash flows.
B24

B25

The additional benefits described in paragraph B23 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:
(a)

the loss of the ability to charge the policyholder for future services.
For example, in an investment-linked life insurance contract, the death of
the policyholder means that the insurer can no longer perform investment
management services and collect a fee for doing so. However, this
economic loss for the insurer does not reflect insurance risk, just as a
mutual fund manager does not take on insurance risk in relation to the
possible death of the client. Therefore, the potential loss of future
investment management fees is not relevant in assessing how much
insurance risk is transferred by a contract.

(b)

waiver on death of charges that would be made on cancellation or

surrender. Because the contract brought those charges into existence, the
waiver of these charges does not compensate the policyholder for a
pre-existing risk. Hence, they are not relevant in assessing how much
insurance risk is transferred by a contract.

(c)

a payment conditional on an event that does not cause a significant loss to

the holder of the contract. For example, consider a contract that requires
the issuer to pay one million currency units if an asset suffers physical
damage causing an insignificant economic loss of one currency unit to the
holder.
In this contract, the holder transfers to the insurer the
insignificant risk of losing one currency unit. At the same time, the
contract creates non-insurance risk that the issuer will need to pay 999,999
currency units if the specified event occurs. Because the issuer does not
accept significant insurance risk from the holder, this contract is not an
insurance contract.

(d)

possible reinsurance recoveries. The insurer accounts for these separately.

An insurer shall assess the significance of insurance risk contract by contract,

rather than by reference to materiality to the financial statements.7 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.

For this purpose, contracts entered into simultaneously with a single counterparty (or contracts
that are otherwise interdependent) form a single contract.

IFRS Foundation

A205

IFRS 4

B26

It follows from paragraphs B23B25 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 B24(b),
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
policyholders life is an insurance contract, unless the aggregate life-contingent
payments are insignificant.

B27

Paragraph B23 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.

B28

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.

Changes in the level of insurance risk

B29

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.

B30

A contract that qualifies as an insurance contract remains an insurance contract

until all rights and obligations are extinguished or expire.

A206

IFRS Foundation

IFRS 4

Appendix C
Amendments to other IFRSs
The amendments in this appendix shall be applied for annual periods beginning on or after
1 January 2005. If an entity adopts this IFRS for an earlier period, these amendments shall be applied
for that earlier period.
*****
The amendments contained in this appendix when this IFRS was issued in 2004 have been incorporated
into the relevant IFRSs published in this volume.

IFRS Foundation

A207