Audience
This guide applies to all officials, particularly chief financial officers and finance teams, in Commonwealth entities that enter into contracts that transfer insurance risk to another party.
Key points
This guide:
- provides guidance for determining whether insurance arrangements established by Commonwealth entities are classified as general insurance contracts (GICs), in the context of Australian Accounting Standards Board (AASB) 1023 General Insurance Contracts (AASB 1023)
- only applies to GICs under AASB 1023, even where an entity does not conduct an insurance business
- replaces Identification of general insurance contracts for accounting purposes (RMG 112), dated November 2016.
Resources
Other relevant publications include:
Introduction
Commonwealth entities are required to prepare their annual financial statements in accordance with the AAS and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR).
AASB 1023 details the accounting requirements for general insurance contracts (GICs). While there are various types of insurance contracts, for AASB 1023 purposes, a GIC is an insurance contract that is not a life insurance contract.
This guide assists entities in identifying whether a GIC exists for AASB 1023 accounting purposes.
All Commonwealth entities within the General Government Sector (GGS) are required to participate in Comcover for general insurance risks, unless they have been exempted by the Minister for Finance.
Part 1 – General insurance contracts (GICs)
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 insured event, adversely affects the policyholder.
For an insurance contract to exist, there must be:
- a contract that transfers an insurance risk from the policyholder to the insurer
- an insurance risk that is significant, excluding any risks created by the contract itself such as indemnities, guarantees and warranties, which could adversely affect the policyholder
- agreement that the insurer will pay significant benefits if the insured event occurs.
Under the definitions provided at paragraph 19.1 of AASB 1023, a GIC is an insurance contract that is not a life insurance contract. Any contract that transfers insurance risk from one party to another and is not a life insurance contract could be a GIC.
Under AASB 1023, any entity that issues an insurance contract is an ‘insurer’, whether or not that entity is regarded as an insurer for legal, regulatory or supervisory purposes.
Example 1: Contracts that are general insurance contractsContracts that are GICs, where the transfer of insurance risk is significant, include:
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Part 2 – Determining whether a GIC exists
Figure 1 shows the elements that must all be present for an agreement to be a GIC. References to Appendix A of AASB 1023 are included, however, these do not replicate the appendix. Other paragraphs of AASB 1023 may also be relevant to users of this guide in determining whether a GIC exists.
Entities must advise Comcover as soon as practicable if any risk that is covered by Comcover is also covered under a separate insurance policy.
Assessing the significance of risks and benefits
In determining whether a GIC exists, entities will need to apply professional judgement in assessing whether the:
- insurance risk being transferred from the policyholder to the insurer is significant
- policyholder will derive significant additional benefits from the insurer if the insured event occurs.
The significance of the insurance risk needs be assessed on a case-by-case basis, in accordance with the entity’s risk management policy.
Example 2: Significance of an insurance riskA Commonwealth company (that is not classified to the GGS) enters into an insurance contract to cover the risk associated with flood or earthquake damage. While the likelihood of the insured event occurring may be low, the consequences of a flood or earthquake could be high. |
Example 3: Significance of additional benefitIf the benefit payable is similar to the interest the policyholder would receive if they invested the insurance premium, then the additional benefit would not be significant. |
Part 3 – Arrangements that are not GICs
Below are examples of contracts that are not GICs. Also see the examples at
Appendix A, paragraph 18 of AASB 1023.
Example 4: Contracts that are not general insurance contractsExamples of contracts that are not GICs include:
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Appendix A, paragraph 18(b) of AASB 1023 notes that self-insurance is not a GIC.
Self-insurance occurs where a risk that could be covered by an insurance contract is retained. Under self-insurance arrangements, there is no insurance contract as there is no agreement to the transfer of an insurance risk to another party.
Other contracts that do not meet the GIC definition
Where a contract does not satisfy the definition of a GIC, the entity should consider whether the following AAS apply:
- AASB 4 Insurance Contracts – applies to fixed-fee service contracts that meet the definition of an insurance contract such as maintenance contracts or roadside assistance contracts
- AASB 15 Revenue from Contracts with Customers – where a contract does not create financial assets or financial liabilities
- AASB 137 Provisions, Contingent Liabilities and Contingent Assets – in respect to legal and constructive obligations and contingent liabilities, such as product warranties and refund policies issued directly by a manufacturer or retailer
- AASB 9 Financial Instruments – where a contract creates financial instruments such as financial guarantees, loans and receivables, and derivatives
- AASB 1038 Life Insurance Contracts – in relation to life insurance contracts.
Part 4 – Accounting and disclosure requirements
Where a GIC exists, entities are to:
- account for the GIC in accordance with the requirements in AASB 1023
- disclose the GIC in accordance with the requirements at section 17 of AASB 1023.
Appendix 1 – Definitions
Term |
AASB 1023 definition |
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. |
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General insurance contract |
An insurance contract that is not a life insurance contract. |
Insurance contract |
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. |
A risk, other than financial risk, transferred from the holder of a contract to the issuer. |
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An uncertain future event covered by an insurance contract which creates insurance risk. |
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The party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs. |
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Life insurance contract |
An insurance contract, or a financial instrument with a discretionary participation feature, regulated under the Life Insurance Act 1995, and similar contracts issued by entities operating outside Australia. |
A party that has a right to compensation under an insurance contract if an insured event occurs. |
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A contract that requires payment based on climatic, geological or other physical variables. |