Insurance - PricewaterhouseCoopers

Definition of an insurance contract
AASB 4 and AASB 1023 include a definition of an insurance contract. An insurance
contract is defined as a contract under which one party (the insurer) 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.
Insurance risk
Insurance risk is risk other than financial risk. Financial risk is defined as the risk
of a possible future change in one or more of a specified interest rate, financial
instrument price, commodity price, foreign exchange rate, index of prices or rates, a
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.
Significant risk
Insurance risk is significant if, and only if, an insured event could cause an insurer
to pay significant additional benefits in any scenario, excluding scenarios that lack
commercial substance.
A contract that transfers financial risk alone, or only insignificant amounts of
insurance risk, is treated under AASB 139, to the extent that it gives rise to a
financial asset or financial liability.
General insurance contracts
AASB 1023 deals with those contracts that meet the definition of a general insurance
contract. General insurance contracts are defined as insurance contracts that are not
life insurance contracts i.e. insurance contracts that are not governed by the Life Act.
Definition of premium and earning pattern
The revised AASB 1023 clarifies the measurement of premium revenue.
Premium revenue comprises premiums from direct business (including underwriting
pools written by the entity) and premiums from reinsurance business (including
underwriting pools written by other members of the pool). They cover anticipated
claims, reinsurance premiums, administrative, acquisition and other costs, and a
profit component.
Premium revenue includes fire service levies collected from policyholders as there
is no direct nexus between fire brigade charges and the levy that insurers charge
policyholders. The fire brigade expense is brought to account in accordance with the
earning of the premium to which it relates.
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