Promises to transfer distinct goods or non-insurance services

Last update 20/12/2019

Promises to transfer distinct goods or non-insurance services – In a final step, after separating non-closely related embedded derivatives and distinct investment components (see ‘Separation of Insurance Contracts‘, an entity should separate from the host insurance contract any promise to transfer distinct goods or non-insurance services to a policyholder.

A good or non-insurance service is distinct if the transferee can benefit from the good or service either on its own or together with other resources that are readily available. A resource is readily available if it is either sold separately or the transferee already owns it. A good or non-insurance service is not distinct if the cash flows and risks associated with that good or service are highly interrelated with those of the insurance component and the entity provides a significant service in integrating the good or service with the insurance component.

Activities that an insurer has to perform to fulfill the insurance contract, such as administrative tasks to set up the contract, are not separated. In general, processing the claims received is part of the activities that the insurer must undertake to fulfill the contract and is not a distinct service that should be separated. There are, however, exceptions, in particular, if the insurance company provides the service to an entity that self-insures a part of its risks. Illustrative Example 5 to IFRS 17 demonstrates a contract with a distinct service component that should be separated.

Once the entity has concluded that a promise to transfer goods or non-insurance services is accounted for separately, it should allocate the cash flows to the insurance component and any promises to provide goods or non-insurance services accounted for separately.

A comprehensive example of how components are separated from an insurance contract is included in Illustrative Example 4 to IFRS 17.

Example

The following example illustrates the requirements in IFRS 17 B31–B35 for separating non-insurance components from insurance contracts.

Example 4—Separating components from a life insurance contract with an account balance

Assumptions

An entity issues a life insurance contract with an account balance. The entity receives a premium of CU1,000 when the contract is issued. The account balance is increased annually by voluntary amounts paid by the policyholder, increased or decreased by amounts calculated using the returns from specified assets and decreased by fees charged by the entity.

The contract promises to pay the following:

a death benefit of CU5,000 plus the amount of the account balance, if the insured person dies during the coverage period; and
the account balance, if the contract is cancelled (ie there are no surrender charges).

The entity has a claims processing department to process the claims received and an asset management department to manage investments.

An investment product that has equivalent terms to the account balance, but without the insurance coverage, is sold by another financial institution.

The entity considers whether to separate the non-insurance components from the insurance contract.

Analysis

Separating the account balance

The existence of an investment product with equivalent terms indicates that the components may be distinct, applying paragraph IFRS 17 B31(b). However, if the right to death benefits provided by the insurance coverage either lapses or matures at the same time as the account balance, the insurance and investment components are highly interrelated and are therefore not distinct, applying paragraph IFRS 17 B32(b). Consequently, the account balance would not be separated from the insurance contract and would be accounted for applying IFRS 17.

Separating the claims processing component

Claims processing activities are part of the activities the entity must undertake to fulfil the contract, and the entity does not transfer a good or service to the policyholder because the entity performs those activities. Thus, applying paragraph IFRS 17 B33, the entity would not separate the claims processing component from the insurance contract.

Separating the asset management component

The asset management activities, similarly to claims processing activities, are part of the activities the entity must undertake to fulfil the contract, and the entity does not transfer a good or service to the policyholder because the entity performs those activities. Thus, applying paragraph IFRS 17 B33, the entity would not separate the asset management component from the insurance contract.

Promises to transfer distinct goods or non-insurance services

Example

The following example illustrates the requirements in IFRS 17 B31–B35 for separating non-insurance components from insurance contracts.

Example 5—Separating components from a stop-loss contract with claims processing services

Assumptions

An entity issues a stop-loss contract to an employer (the policyholder). The contract provides health coverage for the policyholder’s employees and has the following features:

insurance coverage of 100 per cent for the aggregate claims from employees exceeding CU25 million (the ‘stop-loss threshold’). The employer will self-insure claims from employees up to CU25 million.
claims processing services for employees’ claims during the next year, regardless of whether the claims have passed the stop-loss threshold of CU25 million. The entity is responsible for processing the health insurance claims of the employees on behalf of the employer.

The entity considers whether to separate the claims processing services. The entity notes that similar services to process claims on behalf of customers are sold on the market.

Analysis

Separating the claims processing services

The criteria for identifying distinct non-insurance services in paragraph B34 are met in this example:

the claims processing services, similar to the services to process the employees’ claims on behalf of the employer, are sold as a standalone service without any insurance coverage; and
the claims processing services benefit the policyholder independently of the insurance coverage. Had the entity not agreed to provide those services, the policyholder would have to process its employees’ medical claims itself or engage other service providers to do this.

Additionally, the criteria in paragraph B35 that establishes if the service is not distinct are not met because the cash flows associated with the claims processing services are not highly interrelated with the cash flows associated with the insurance coverage, and the entity does not provide a significant service of integrating the claims processing services with the insurance components. In addition, the entity could provide the promised claims processing services separately from the insurance coverage.

Accordingly, the entity separates the claims processing services from the insurance contract and accounts for them applying IFRS 15 Revenue from Contracts with Customers.