An insurance policy rarely contains just insurance. A single premium can pay for a savings element, a guaranteed return and services such as health consultations. Some of those pieces belong under IFRS 17. Others have to come out and be accounted for elsewhere. Getting that split wrong changes revenue, the insurance liability and the disclosures from day one, and it is one of the first places an exam marker looks.
Why separation matters
IFRS 17 measures insurance contracts on their own terms. A component that another standard would govern if it were sold on its own can distort that measurement when it is left inside the contract, so the standard requires some components to be unbundled. Separation is not a free choice. Where the conditions are met an insurer must separate, and where they are not met it may not.
Three kinds of component, three different questions
The candidates fall into three groups: investment components, promises to provide goods or services other than insurance and embedded derivatives. Each group has its own test, and the tests ask different things. Is a savings element so tied to the cover that it cannot stand apart? Could the policyholder benefit from a service on its own? Is a feature closely related to the insurance it sits in? The answers turn on the facts of the policy, and the standard is precise about how the tests fit together. That is where most candidates lose marks.
What the lesson works through
- one comprehensive policy with a savings element, a guarantee and a service
- the embedded derivative, with its outcome taken as given in the scenario
- the tests applied to the investment component and the service
- unbundling the premium and reconciling the parts
- the inception journal and the movements during the year
- what the policy does not show
Unbundle a policy yourself
We keep the sequence, the destinations and the figures inside the lesson. Work through the Amatle Institute lesson on separating components under IFRS 17 to see one policy taken apart, test by test, with every journal shown.
Questions about this topic
Why does IFRS 17 require some components to be separated from an insurance contract?
Because a component that another standard would govern if it were sold on its own can distort the measurement of the insurance contract when it is left inside. Separating it keeps IFRS 17 focused on the insurance itself.
Can an insurer choose which components to separate?
No. Separation is required when a component meets the conditions in the standard and is not permitted when it does not. A savings element or a service that is not distinct stays inside the insurance contract.
What kinds of component can be separated from an insurance contract?
Three kinds: investment components, promises of goods or services other than insurance and embedded derivatives. Each has its own test, and the lesson shows how they apply to one policy.
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IFRS and SAM, one requirement at a time
Each week you get the Institute's new articles: one requirement of IFRS 17, IFRS 9, IFRS 15, IFRS 18 or SAM, worked on a South African case. You start with the free IFRS 18 readiness checklist, ten areas to work through before IFRS 18 takes effect, each with its paragraph reference.