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First Published : May 2025
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2.5.1
2.5.3
2.5.4
2.6 Combining
2.7
2.8
2.9
2.7.1
2.7.2
2.7.3
2.7.4
2.8.1
2.9.1 Cases when an entity does not adopt premium allocation approach
2.9.2 Cases when contracts within a portfolio would fall into different groups only because of law or regulatory constraints 73
2.9.3 Measurement of a group of contract at a higher level of aggregation
2.9.4 Assessment whether set of contracts are in a group
2.9.5 Multi-currency groups of insurance contracts
2.9.6 Inclusion of contracts in the identi ed group of contracts
3.4
3.5
3.3.1
3.3.2
3.3.3
CHAPTER 3 ESTIMATES OF CASH FLOWS
CHAPTER 4
4.3
4.4
4.5
CHAPTER 5
5.4.1
5.4.2
5.4.3
5.5
5.6
5.7
5.9
5.10
5.11
CHAPTER 6
CHAPTER 7
CHAPTER 11 DISCLOSURES
CHAPTER 12
TRANSITION
Identifying Insurance Contracts
Executive summary
Insurance contracts are identified by their characteristics features of compensating the policyholder for specific uncertain future event that adversely affects the policyholders and that the contract transfers significant insurance risk. Ind AS 117 does not include fixed fee service contract like annual maintenance contract and credit related guarantee contract within the scope of insurance contracts. It also excludes product warranties given by manufacturers or dealers.
One or more components are separated from insurance contracts which are: embedded derivatives in accordance with Ind AS 109; a distinct investment component; transfer to a policyholder distinct goods or services other than insurance contract services.
2.1 Meaning of insurance contracts
An insurance contract is defined as a contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. A policyholder is a party that has a right to compensation under an insurance contract if an insured event occurs. A contract is an insurance contract only if it transfers significant insurance risk
The notion that the uncertain event must have an adverse effect on the policyholder is known as insurable interest. This concept may include in the definition of insurance contracts –contracts that require payment if a specified uncertain future event occurs, causing economic exposure similar to insurance contracts, whether the other party has an insurable interest or not; and some contracts used as insurance that do not include a notion of insurable interest, for example, weather derivatives.
TABLE 2.1 EXAMPLES OF INSURANCE CONTRACTS AND CONTRACTS WHICH ARE NOT INSURANCE CONTRACTS
Examples of insurance contracts
Examples contracts which are not insurance contracts
[Paragraph B26, Ind AS 117] [Paragraph B27, Ind AS 117]
a Insurance against theft or damage to property
In effect all re, marine and miscellaneous insurance policies are insurance contract if these contracts contain signi cant insurance risk.
a Investment contracts which have the legal form of an insurance contract but do not expose the insurer to significant insurance risk, for example life insurance contracts in which the insurer bears no significant mortality risk.
These contracts are non-insurancenancial instruments or service contracts.
See Note-4.
b. Insurance against product liability, professional liability, civil liability or legal expenses.
Warranties provided by a manufacturer, dealer or retailer in connection with the sale of its goods or services to a customer as excluded from the scope of Ind AS 117. [See Paragraph 7(a), Ind AS 117]. These contracts are accounted for applying Ind AS 115 Revenue from Contracts with Customers
c. Life insurance and prepaid funeral plans
For example, Care Health Insurance offers a Funeral Expenses Cover plan that provides nancial support to the bene ciaries of a policyholder who passes away. The plan provides death cover of ` 10,000 and funeral cost cover of ` 5,000. Premium amount is ` 118 and term 1 year.
b. Contract which is an insurance contract in legal form but passes all signi cant insurance risk back to the policyholder through non-cancellable and enforceable mechanisms.
This type of contract adjusts future payments by the policyholder as a direct result of insured losses.
See Note-5.
c. Self-insurance
It retains a risk that could have been covered by insurance.
There is no insurance contract because there is no agreement with another party. Mutual bene t insurance meets the de nitions insurance contracts.
If an entity issues an insurance contract to its parent, subsidiary or fellow subsidiary, there is no insurance contract in the consolidated nancial statements because there is no contract with another party.
However, for the individual or separate nancial statements of the issuer or holder, there is an insurance contract.
Examples of insurance contracts
[Paragraph B26, Ind AS 117]
d. Life-contingent annuities and pensions
These contracts that provide compensation for the uncertain future event which is the survival of the annuitant or pensioner. It is for assisting the annuitant or pensioner in maintaining a given standard of living, which would otherwise be adversely affected by his or her survival.
See Note 1 & Example AI.3.
e. Disability and medical cover Disability insurance pays out if a policyholder is unable to work and earn an income due to a disability. In case of an accident or disease, such a policy can protect the policyholder nancially if he/she becomes disabled as a result of it. It can replace a portion of the income if the insured individual is unable to work due to their condition. The disability insurance plan will also cover any medical bills that the policyholder may incur as a result of the therapy, depending on the policy terms. See Note 2.
f. Surety bonds, delity bonds, performance bonds and bid bonds. These contracts provide compensation if another party fails to perform a contractual obligation.
Example: SBI’s surety Bond Bima. See Note 3
g. Product warranties
Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of Ind AS 117.
However, product warranties issued directly by a manufacturer, dealer or
Examples contracts which are not insurance contracts
[Paragraph B27, Ind AS 117]
d. Contracts (such as gambling contracts) that require a payment if a speci ed uncertain future event occurs, but do not require, as a contractual precondition for payment, that the event adversely affects the policyholder. This does not preclude the speci cation of a predetermined payout to quantify the loss caused by a speci ed event such as death or an accident.
See Note 6.
e. Derivatives that expose one party to nancial risk but not insurance risk. They require that party to make payment based solely on changes in one or more of a speci ed interest rate, nancial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non- nancial variable that the variable is not speci c to a party to the contract.
f. A credit-related guarantee (or letter of credit, credit derivative default contract or credit insurance contract) that requires payments even if the holder has not incurred a loss on the failure of the debtor to make payments when due.
See Examples 2.8 & 2.9.
g. Contracts that require a payment based on a climatic, geological or other physical variable that is not speci c to a party to the contract. They are commonly described as weather derivatives).
Examples of insurance contracts
[Paragraph B26, Ind AS 117]
retailer are outside its scope, because they are within the scope of Ind AS 115 and Ind AS 37.
h. Title insurance
This is an insurance against the discovery of defects in title to land that were not apparent when the insurance contract was written. In this case, the insured event is the discovery of a defect in the title, not the defect itself.
i. Travel assistance
This is an insurance to compensate the policyholder in cash or in kind for losses suffered while they are travelling.
j. Catastrophe bonds
They provide for reduced payments of principal, interest or both if a speci ed event adversely affects the issuer of the bond.
These bonds are not treated as insurance contracts if the speci ed event does not create signi cant insurance risk, for example if the event is a change in an interest rate or foreign exchange rate.
k. Insurance swaps and other contracts that require a payment based on changes in climatic, geological or other physical variables that are speci c to a party to the contract.
Notes to Table 2.1:
(1) Examples of life contingent annuity
Examples contracts which are not insurance contracts
[Paragraph B27, Ind AS 117]
h. Contracts that provide for reduced payments of principal, interest or both, that depend on a climatic, geological or any other physical variable, the effect of which is not speci c to a party to the contract.
They are commonly referred to as catastrophe bonds.
Under a life insurance contract, occurrence of an insured event (death of the insured) triggers an annual payment of an amount linked to a price index) say, consumer price index) to the legal heir of the insured. The insured event may also be reaching certain age by the insured. This type of insurance policy is termed as life contingent annuity linked to a cost-of-living index.
Insurance Company Limited. The Proposal, premium deposits, declarations and other particulars (if any) received by the Company from the Policyholder and/ or Member/s, form the basis of this RIDER.
This RIDER is subject to the terms and conditions of the Base Policy. In the event of any inconsistency between the terms and conditions of the Base Policy and this RIDER, the provisions of this RIDER shall prevail with respect to the matters dealt with in this RIDER.
While the Base Policy and the Rider are in force, if Total and Permanent Disability is caused to a Life Insured, the company shall pay the benefits specified in the Schedule/ Endorsement. The benefit under this Rider is in addition to the benefits available under the Base Policy and shall be payable only once during the term of this RIDER irrespective of other Total and Permanent disability caused.
“Total and Permanent Disability” refers to a disability, which:
a. is caused by Bodily Injury resulting from an Accident, and
b occurs due to the said Bodily Injury solely, directly and independently of any other causes, and
c. occurs within one hundred eighty (180) days of the occurrence of such Accident but before the expiry of the cover, and
d. completely, continuously and permanently prevents the Life Insured from engaging in any work, occupation or profession to earn or obtain any wages, compensation or profit, such condition to persist for at least six (6) months from the date of disability, and
e the loss of both arms, or of both legs, or of one arm and one leg, or of both eyes, shall be considered total and permanent disability, without prejudice to other causes of total and permanent disability.
Many term insurance policy (a policy that offers a death benefit to the beneficiaries of the policy if the policyholder passes away during the policy term) cover additional riders like accidental benefit or child support riders.
(3) Examples of various types surety bond
The SBI General Insurance offers an insurance product named Surety Bond Bima. This has been introduced to facilitate the growth of infrastructure sector in India. This insurance provides assurance to the project owner in form of a Bond that the contractor would complete the project as per the agreed terms and conditions.
Surety Bond Bima is a risk transfer tool that will safeguard the project owner from the losses that may arise in case the contractor fails to perform their contractual obligation. Unlike a bank guarantee, the Surety Bond Bima does not require any large collateral from the contractor and will provide much-needed financial reassurance to all parties involved in infrastructure projects.
A surety bond is a risk transfer mechanism wherein an insurer provides a guarantee to a beneficiary or obligee that the principal or contractor will meet his contractual obligations. In case the principal fails to deliver his promise, a monetary compensation is paid to the obligee by the insurer. There are three parties involved:
If the contract does not create financial assets or financial liabilities, Ind AS 115 applies:
Revenue is recognised when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled.
(6) Contracts require a payment if a specified uncertain event occurs, but do not require an adverse effect on the policyholder as a precondition for payment – These contracts are not insurance contracts although the holder uses the contract to mitigate an underlying risk exposure.
An example of this type of contract is a derivative contract used by the holder. The contract is used to hedge an underlying non-financial variable that is correlated with cash flows from an asset of the entity. The derivative is not an insurance contract because payment is not conditional on whether the holder is adversely affected by a reduction in the cash flows from the asset.
By definition an insurance contract refers to an uncertain event for which an adverse effect on the policyholder is a contractual precondition for payment. This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse effect, but permits the insurer to deny payment if it is not satisfied that the event caused an adverse effect.
Refer to Examples 2.1–2.18 for analysis of cases identifying whether a contract is an insurance contract.
2.2 Insured events
An uncertain future event covered by an insurance contract that creates insurance risk.
Examples of insured events:
(i) In life insurance policies the event insured against is the death of the insured individual. Life insurance typically covers death from any cause, whether it is due to illness, accident, or natural causes, unless specifically excluded in the policy. However, some policies may have specific waiting periods or exclusions for certain causes of death, such as suicide within a specified period after the policy’s inception.
Death is certain but its timing is uncertain.
(ii) Casualty insurance – It is a broad type of coverage that protects individuals and businesses against legal liabilities resulting from accidents, injuries or property damages. It encompasses a variety of coverage types, including liability, theft, workers’ compensation, aviation, auto, and cyber risk insurance among others. A specific type of casualty insurance is homeowner’s insurance which provides coverage for damages to the home or for injuries that occurred on the property.
Rs. 1,995/-
