How the new insurance contracts standard, IFRS 17, affects non-insurers

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The new insurance contracts standard, IFRS 17, was effective from January 1 this year. This standard applies to any organisation that issues insurance contracts regardless of whether it is an insurance company.

It is an essential aspect of the standard often overlooked that needs to be appreciated by organisations in the broader financial and non-financial sectors of the economy, as many assumed that it only applies to insurance companies.

The new standard introduces three new measurement approaches for different insurance contracts. The general measurement model (GMM) is the default model and is applied to all insurance contracts unless they have a direct participation feature, or the contract is eligible for another measurement model.

The premium allocation approach (PAA) is an optional model that offers simplicity for short-term insurance contracts (less than 12 months). In contrast, insurance contracts with direct participation features apply the variable fee approach (VFA), which is irrelevant to non-insurers. Some of the arrangements by non-insurers that could be impacted by IFRS 17 include the following.

Fixed-fee service contracts where organisations provide a service for a fixed fee could be within the scope of IFRS 17 if they meet specific criteria. Examples include roadside assistance and maintenance contracts where the service provider agrees to repair specified equipment after a malfunction.

Specific performance guarantee contracts could be within the scope of IFRS 17, where significant insurance risk is transferred from an insured event that is not a financial guarantee contract in exchange for a premium.

Therefore organisations that issue these instruments should analyse them carefully to ensure they are accounted for appropriately. Self- insurance is another arrangement used by non-insurers. It is a means of retaining the risk that should have been covered by an insurer and is not considered an insurance contract in IFRS 17 as there is no insurance contract with another party.

However, there are instances where this arrangement is structured using a captive insurance subsidiary. Such arrangements are not in the scope of IFRS 17 from a consolidated financial statements perspective.

But if the captive insurance subsidiary prepares separate IFRS financial statements and assumes significant insurance risk, the subsidiary will account for those contracts under IFRS 17 as insurance contracts.

The writer is a Partner at Deloitte East Africa. He writes and speaks on corporate reporting.

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