Insurance Contracts Under Ind AS 117 – Concepts and Insured Events

Insurance Contracts under Ind AS 117 are agreements 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 them. These contracts must transfer significant insurance risk and exclude service contracts, financial guarantees, and product warranties issued by manufacturers or dealers.

Table of Contents

1. Executive Summary
2. Meaning of Insurance Contracts
3. Insured Events

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1. Executive Summary

Insurance contracts are identified by their characteristics features of compensating the policyholder for specific uncertain future event that adversely affects the policyholder 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 under Ind AS 117 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. 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 under Ind AS 117, 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.

These contracts are excluded from the definition of insurance contracts. The concept of insurable interest included in the definition of insurance contract because without reference to ‘adverse effect’, the definition might have captured any prepaid contract to provide services with uncertain costs and gambling. The concept of insurable interest also makes a principle-based distinction, between insurance contracts and contracts used for hedging.

Comparison with Ind AS 104 – Examples of insurance contracts as per Paragraph B26(a)-(k) of Ind AS 117 are same as the example earlier covered in Paragraph B18(a)-(m) of Ind AS 104 except that –

• examples of Ind AS 117 does not include reinsurance contracts which are by definition insurance contracts and included in the scope of Ind AS 117.
• Example of Ind AS 117 excludes credit insurance (financial guarantee) as described in Paragraph B18(g) of Ind AS 104.  It is to mention that Ind AS 104 also excluded these contracts from being considered as insurance contract.

Credit Insurance – As per Paragraph B18(g) of Ind AS 104, a credit insurance contract provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. These contracts may have various legal forms, such as:

• guarantee;
• some types of letter of credit;
• a credit derivative default contract.

Although these contracts meet the definition of an insurance contract, and they also meet the definition of a financial guarantee contract in Ind AS 109   and are within the scope of Ind AS 32 and Ind AS 109, not Ind AS 104 [refer to paragraph 4(d) of Ind AS 104].

These contracts are excluded from the scope of Ind AS 117 by virtue of Paragraph 7(e) of Ind AS 117.

Paragraph B27(f), Ind AS 117 [Paragraph B19(f), Ind AS 104] explains that a credit‑related guarantee contract (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 is not an insurance contract.

Examples of contracts that are not insurance contracts under Ind AS 117 [Paragraph 26, Ind AS 117] are also same as earlier covered by Ind AS 104 [Paragraph B19, Ind AS 104]. See Table AI.1 for a discussion on examples of insurance contracts and contracts which are not insurance contracts as per Ind AS 104.

Table 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 fire, marine and miscellaneous insurance policies are insurance contract if these contracts contain significant 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 under Ind AS 117 in which the insurer bears no significant mortality risk. These contracts are non-insurance financial instruments or service contracts.
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.	b. Contract which is an insurance contract in legal form but passes all significant 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.
c. Life insurance and prepaid funeral plans For example, Care Health Insurance offers a Funeral Expenses Cover plan that provides financial support to the beneficiaries 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.	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 benefit insurance meets the definitions insurance contracts. If an entity issues an insurance contract to its parent, subsidiary or fellow subsidiary, there is no insurance contract in the consolidated financial statements because there is no contract with another party. However, for the individual or separate financial statements of the issuer or holder, there is an insurance contract.
d. Life-contingent annuities and pensions These contracts 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.	d. Contracts (such as gambling contracts) that require a payment if a specified 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 specification of a predetermined payout to quantify the loss caused by a specified event such as death or an accident.
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 financially 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.	e. Derivatives that expose one party to financial risk but not insurance risk. They require that party to make payment based solely on changes in one or more of a specified interest rate, financial 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‑financial variable that the variable is not specific to a party to the contract.
f. Surety bonds, fidelity 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.	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.
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 retailer are outside its scope, because they are within the scope of Ind AS 115 and Ind AS 37.	g. Contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract. They are commonly described as weather derivatives).
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.	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 specific to a party to the contract. They are commonly referred to as catastrophe bonds.
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 specified event adversely affects the issuer of the bond. These bonds are not treated as insurance contracts if the specified event does not create significant 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 specific to a party to the contract.

Notes to Table

(1) Examples of life contingent annuity

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.

Various annuity plans (Annuity Plus) of SBI life are:

Life Annuity (Single Life)

• Lifetime Income – (ASP Scheme ID: AS001001) Annuity will be payable at a constant rate for lifetime and ceases immediately on death of the Life Assured (NPS subscriber).
• Lifetime Income with Capital Refund – (ASP Scheme ID – AS001002) Annuity will be payable at constant rate for lifetime and will cease on death of the life assured (NPS subscriber) and premium amount will be refunded to the nominee.

Life Annuity (Joint Lives)

• Life and Last Survivor 100% Income – (ASP Scheme ID – AS001003) Annuity will be payable at a constant rate till the primary annuitant (NPS subscriber) is alive. On death of the primary annuitant (NPS subscriber), 100% of the last annuity payout will continue throughout the life of the surviving second annuitant.
• Life and Last Survivor 100% Income with Capital Refund – (ASP Scheme ID – As001004) Annuity will be payable at a constant rate till the primary annuitant (NPS subscriber) is alive. On death of the primary annuitant (NPS subscriber), 100% of the last annuity payment will continue throughout the life of the surviving second annuitant. On death of the second annuitant, premium amount will be refunded to the nominee.
• NPS – Family Income (ASP Scheme ID – AS001005)

Under this option, the annuity benefits would be payable in accordance with the regulations as prescribed by the Pension Fund Regulatory and Development Authority (PFRDA).

As per the current regulations, the annuity benefits will be payable for life of the subscriber and his/her spouse as per the annuity option “Life and Last Survivor – 100% Income with Capital Refund”. In case the subscriber does not have a spouse, the annuity benefits will be payable for life of the subscriber as per the annuity option “Lifetime Income with Capital Refund”. In case of demise of the subscriber before the vesting of annuity, the annuity benefits will be payable for life of the spouse as per the annuity option “Lifetime Income with Capital Refund”.

On death of the annuitant(s), the annuity payment would cease and the refund of purchase price shall be utilized to purchase an annuity contract afresh for living dependent parents (if any) as per the order specified below:

(a) Living dependent mother of the deceased subscriber;

(b) Living dependent father of the deceased subscriber.

However, the annuity amount would be revised and determined as per the annuity option “Lifetime Income with Capital Refund” using the annuity rate prevalent at the time of purchase of such annuity by utilising the premium required to be refunded to the nominee under the annuity contract.

(2) Example of Max Life Group Accidental Total and Permanent Disability Rider under Group Insurance Policy UIN – 104B015V02

This Rider Contract forms part of and supplements the Group Insurance Policy referred to in the Schedule/ Endorsement (the “Base Policy”) issued by Max Life 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:

1. is caused by Bodily Injury resulting from an Accident, and
2. occurs due to the said Bodily Injury solely, directly and independently of any other causes, and
3. occurs within one hundred eighty (180) days of the occurrence of such Accident but before the expiry of the cover, and
4. 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
5. 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:

• The Surety (Insurance Companies like SBI General) will provide the financial guarantee to the Obligee/beneficiary.
• Obligee or Beneficiary (Example – Government, Infrastructure Development Authorities etc.) is the party that needs the surety and is often the beneficiary of the surety bond.
• Principal (could be the owner or contractor) – the party that purchases the Surety Bond from an insurer as a guarantee and undertakes a commitment to perform the obligations as per the contract entered.

There are various types of surety bonds:

• Bid Bond – Operates as an alternative of earnest money deposit and if the Contractor fails to accept the contract post winning the bid, Surety pays the Obligee earnest money or the cost of retendering or cost of differential between the original bidder and the next best bidder.
• Advance Bond – Typically this bond offers coverage against the principal not being able to mobilise the requisite resources as defined in the contract but has taken advance from the Obligee (Beneficiary) and the delay caused due to such non-mobilisation of resources may result in project delays which an Obligee may claim from the Principal as per the Contract Terms.
• Performance Bond – This type of Bond can be raised by the Obligee in case the principal fails to perform the contractual terms and execute the project to its fullest, such bond can be raised at various milestones of the project or at the end of the project if the completion of said project is delayed or is not in accordance with the Contractual Terms.
• Retention Money Bond – Certain contracts warranty that a portion of the contract will be retained for a specified period to ensure that the project has completed satisfactory performance period or machinery has performed to its proposed capabilities. Currently, many obligees keep 10%-20% of the machine value as the retention money and is released after specified time period (Typically 1 year in case of Capital Goods, 1-3 years in case of Projects like Bridges, Culverts etc.).

(4) Investment contracts with discretionary participation features do not meet the definition of an insurance contract. However, applying Paragraph 3(c) of Ind AS 117 they are within the scope of this standard provided they are issued by an entity that also issues insurance contracts.

(5) Contract which is an insurance contract in legal form but passes all significant insurance risk back to the policyholder through non‑cancellable and enforceable mechanisms – If the contract creates financial assets or financial liabilities they fall within the scope of Ind AS 109. This means that the parties to the contract inter alia use what is sometimes called deposit accounting, which involves the following:

• one party recognises the consideration received as a financial liability, rather than as revenue;
• the other party recognises the consideration paid as a financial asset, rather than as an expense.

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 under Ind AS 117 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.

3. 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.