Thanks for this.
Re the already exposed to.. it's a criteria of the standard:
"Insurance risk is the risk the entity accepts from the policyholder. This means the entity must accept, from the policyholder, a risk to which the policyholder was already exposed. Any new risk created by the contract for the entity or the policyholder is not insurance risk."
The standard is unhelpfully silent on what that actually means.
A net research example though of new risk (and therefore not insurance risk):
- Situation: A company adopts a remote work model for its employees and purchases insurance to cover the risk of mental health issues (like stress, anxiety, or burnout) caused by remote working.
- New Risk Created: The insurance contract introduces a new risk related to the mental health impact of remote work. Employees were not previously exposed to these specific risks, and the employer now assumes the liability for workplace stress resulting from the remote work setup.
This sounds similar to the indemnities we issue because it's the appointment that creates the risk for the director and we've issued an agreement as part of the appointment to pick up the tab for any liabilities they're now exposed to. But I suppose you can contrast that with an insurance policy for travelling aboard - the risk doesn't exist until you've decided to travel abroad, yet that type of policy would meet the criteria for being caught by the standard.
The prohibition on "new risk" is meant to prevent speculation with the contract. That is,
the contract itself shouldn't create financial risk that doesn't exist without the contract. One of the (many) abuses of COLI/BOLI is "janitor policies", where a low-level employee who does something of small financial value would be insured for an exorbitant amount. Imagine if a company were to take out a $10,000,000 life policy on an elderly office cleaner. This isn't really insurance; the coverage is so large compared to the amount of potential financial harm from losing the cleaner's services that it is reasonable to doubt the "insurance" nature of the contract. This is really speculation. The contract is in place so that company will get a tax-exempt windfall when the person dies.
In your example, employees are subject to risks of burnout from remote work regardless of whether their employer has insurance to cover that risk. It isn't the insurance contract that creates the risk of burnout. It only transfers the risk of such loss to the insurer. As long as the contract doesn't provide the company with so great a payoff that the company sees a material gain if the employee burns out and claims under the contract, the contract isn't speculating. The fact that it's covering a risk that the company had previously accepted rather than transferred isn't what the prohibition is meant to stop.
The indemnities we issue are also in-house - they're not taken out using insurance companies, and we don't charge any premiums for them, so I think there's maybe an argument there as well that they're a form of self-insurance - in which case would take them out of the scope as well.
That may be your best argument to scope them out of IFRS 17. But the countervailing argument is that this "self-insurance" coverage is part of the insured's overall compensation, and the implied premium would be the fair value of the coverage, roughly the amount an external insurer would charge to cover a similarly-situated insured. (Thank you, Internal Revenue Service.) Does the UK have a similar "implied compensation" law?
Have you considered bringing in an IFoA-credentialled actuary on this? I'm not qualified for UK actuarial practice, just US practice. If you're self-insuring, an IFoA actuary with casualty/general insurance experience could review the sufficiency of whatever contingent provisions you've set aside, or recommend changes to improve everyone's situation. Just a suggestion.
How does US GAAP define 'significant insurance risk'? IFRS mandates a contract by contract basis rather than applying a blanket materiality level. Given that we don't charge premiums, all of them are significant by default on a purely financial basis. Does US GAAP allow the factoring in of the probability of the future event happening in deciding whether or not it's significant? All our indemnities are remote contingent liabilities with low probabilities.
US GAAP is vague on that point as well. Most P&C coverages are short-term coverages for US GAAP (ASC 944-20-05-13), since they renew at least annually and can adjust the premium or cancel with each renewal. They're designed to cover the claim costs with current premiums. For long-term contracts, ASC 944-20-15-21 requires transfer of more than a nominal amount of risk, with "nominal" defined as "of insignificant amount or remote possibility". But there aren't bright-line amounts required by US GAAP; it's left to actuarial judgment. Plus, low probabilities can become substantial risks if the are potentially severe enough. (Thank you, US tort lawyers.)
