IFRS Contract Boundary Different from Policy Term under current practice
IFRS17 requires that reinsurance contracts held to be measured as a separate contracts, so how does contract boundary different from the policy term?
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IFRS17 requires that reinsurance contracts held to be measured as a separate contracts, so how does contract boundary different from the policy term?
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Not sure how the first part relates to the second part of your question here, but a contract boundary differs from the policy term because there could be certain clauses that "force" renewal or limit the ability of the insurer to reprice the risk. For example, having a policy that guarantees the insured will be able to renew at the same rate during the next year will extend the contract boundary beyond the policy term
in the battle cards,
identify examples where IFRS contract boundary may be different from policy term under current practice
cancellable contracts:
- under IFRS 17: contract boundary = cancel date
(under current practice, policy term extends beyond cancel date if that would increase the liability)
title insurance: (covers defects in the title to land or buildings)
- under IFRS 17: contract boundary = period of ownership of land/building (coverage is triggered by discovery of defect)
(under current practice, policy term = term of contract since coverage is triggered by the defect itself, not its discovery)
onerous contracts:
- IFRS 17 must recognize liability of an onerous contract when signed
(under current practice the entity can wait until effective date to recognize liabilities)
**_reinsurance held:
- IFRS 17 requires reinsurance contracts held to be measured as separate contracts
(current practice determines policy term for underlying direct contract only)_**
Is current practice in this battle card referring to pre IFRS 17?
no it is referring to IFRS17
Thanks for the clarification
Could you clarify how the concept of contract boundary is different from policy term? I'm not entirely sure I understand what a contract boundary is and how it is set. And is this concept of contract boundary a new concept specific to IFRS17 or did it exist prior?
I explained the difference between a policy term and contract boundary in my first answer to the OP. It is basically very similar to the length of the policy with some minor nuances. A contract boundary is set during negotiations and represents the length of an insurer/reinsurer's obligations. In other words, the length in which cash flows should be considered to be associated with bespoke policy. Its an IFRS17 term.
I'm thrown off when it mentions 'cash flows' in the boundary.
For example, if I have a 1 year policy and I have a claim in the last month, I'm likely going to receive the claim payment past my policy term ie. cash flow is happening after the policy term. But I'm assuming that cash flow would still be in the boundary of the policy. Please let me know if I'm understanding that correctly. Thanks!
@Staff-T1 , @graham , any comment on the above would be appreciated, thanks!
Yes but the source of those claims are happening in the contract boundary. For example, I have a policy in force for 2023 and I have an accident in June 2023. Yes I could be having payments 10 years later, but the cash flows are due to an event that occurs within the boundary of the policy
Thanks!