Insurance is a term commonly understood by many, but how does it fit in the financial industry? What is the relation between insurance and accounting? The team of professionals at GCS Malta delve into the subject in our latest article.
What is an insurance contract?
An insurance contract is 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.
Accounting Standard
IFRS 17 Insurance Contracts supersedes IFRS 4 Insurance Contracts and is effective for periods beginning on or after 1 January 2023, with earlier adoption permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have also been applied.
The changes to insurance accounting could significantly affect insurers’:
- Profitability patterns
- The volatility of financial results and equity
- Budgeting and forecasting practices; and
- Business development planning
Scope
The main objectives of IFRS 17 are to :
- Ensure that an entity provides relevant information that faithfully represents insurance contracts held;
- Provide a basis for users of financial statements to effectively assess the impact of insurance contracts on the entity’s financial position, performance and cash flows;
- Be used as a default model for all insurance contracts;
- Provide an optional simplified model for short-term insurance contracts;
- Provide a basis for accounting for participating business (i.e. contracts where an insurer shares the performance of underlying investments with the policyholders). For these types of arrangements, the insurance liability borne by the insurer is always tied to underlying assets and policyholders are rewarded in line with the performance of the underlying;
- Ensure comparability across the insurance industry
An entity applies IFRS 17 Insurance Contracts to:
- Insurance contracts issued;
- Reinsurance contracts held; and
- Investment contracts with discretionary participation features (those contracts where the insurer shares the performance of underlying items with policyholders) if an entity also issues insurance contracts
Why GCS Malta?
As one of our primary services, GCS Malta’s accounting experts offer a full range of accounting and support services. Get in touch today for more information on how we can aid your business.
