Overview of IFRS 4

Insurance contracts are contracts where an entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if the insured event adversely affects the policyholder. The risk transferred in the contract must be insurance risk, which is any risk except for financial risk.

IFRS 4 applies to all issuers of insurance contracts, whether or not the entity is legally an insurance company. It does not apply to accounting for insurance contracts by policyholders.

IFRS 4 was designed as an interim standard, pending completion of IFRS 17. It allows entities to continue with their existing accounting policies for insurance contracts if those policies meet certain minimum criteria. One of the minimum criteria is that the amount of the insurance liability is subject to a liability adequacy test. This test considers current estimates of all contractual and related cash flows. If the liability adequacy test identifies that the insurance liability is inadequate, the entire deficiency is recognized in the income statement.

Accounting policies modelled on IAS 37, ‘Provisions, contingent liabilities and contingent assets’, are appropriate in cases where the issuer is not an insurance company and where there is no specific local GAAP for insurance contracts (or the local GAAP is only directed at insurance companies). Disclosure is particularly important for information relating to insurance contracts, because entities can continue to use local GAAP accounting policies for measurement. IFRS 4 has two main principles for disclosure.

Disclosures of iFRS 4

  • information that helps users understand the amounts in the insurer’s financial statements that arise from insurance contracts: [IFRS 4.36-37]
    • reconciliations of changes in insurance liabilities, reinsurance assets, and, if any, related deferred acquisition costs
    • the effect of changes in assumptions
    • information about the assumptions that have the greatest effect on the measurement of assets, liabilities, income, and expense including, if practicable, quantified disclosure of those assumptions
    • if the insurer is a cedant, certain additional disclosures are required
    • the recognised assets, liabilities, income, expense, and cash flows arising from insurance contracts
    • accounting policies for insurance contracts and related assets, liabilities, income, and expense
  • Information that helps users to evaluate the nature and extent of risks arising from insurance contracts: [IFRS 4.38-39]
    • those terms and conditions of insurance contracts that have a material effect on the amount, timing, and uncertainty of the insurer’s future cash flows
    • the information about credit risk, liquidity risk and market risk that IFRS 7 would require if the insurance contracts were within the scope of IFRS 7
    • risk management objectives and policies
    • information about insurance risk (both before and after risk mitigation by reinsurance), including information about:
      • actual claims compared with previous estimates
      • concentrations of insurance risk
      • the sensitivity to insurance risk
    • 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.