Significant insurance risk

Learning objectives

• Explain that the significance of insurance risk is assessed contract by contract, by reference to a scenario that has commercial substance in which the issuer could suffer a loss on a present value basis.L2
• Apply the significance assessment to a case in which the scenarios are given.L3

Normative references

• IFRS 17 §B22The significance of insurance risk is assessed contract by contract: insurance risk may be significant even if there is minimal probability of significant losses for a portfolio or group of contracts.
• IFRS 17 §B18Insurance risk is significant if, and only if, an insured event could cause the issuer to pay additional amounts that are significant in any single scenario that has commercial substance, even if the insured event is extremely unlikely.
• IFRS 17 §B19A contract transfers significant insurance risk only if there is a scenario that has commercial substance in which the issuer could suffer a loss on a present value basis; a reinsurance contract that transfers substantially all of the insurance risk relating to the reinsured portions is deemed to meet this condition.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• A savings contract provides that on the policyholder's death the issuer pays the account balance plus an additional lump sum of 50,000 euros. In the scenario studied, which has commercial substance (case assumption), the additional sum clearly exceeds the present value of the fees collected by the issuer, which therefore suffers a loss in present value on this contract. What is concluded about the insurance risk?L2
• Orline SA offers a savings contract of 100,000 euros. On the policyholder's death, it pays the account balance plus 500 euros (scenario A). On accidental death before age 40, it additionally pays a lump sum of 60,000 euros (scenario B), whereas the present value of the fees collected on the contract is 8,000 euros (case data). Management judges that scenario B has commercial substance (management's judgement). Write a short note concluding on whether the insurance risk is significant, distinguishing rule, case facts and professional judgement.L3