| A2.5 | Some insurance contracts require or permit payments to be made in kind. An example is when the insurer replaces a stolen article directly, instead of reimbursing the policyholder. Another example is when an insurer uses its own hospitals and medical staff to provide medical services covered by the contracts. |
| A2.6 | Some fixed-fee service contracts in which the level of service depends on an uncertain event meet the definition of an insurance contract in this FRS but are not regulated as insurance contracts. One example is a maintenance contract in which the service provider agrees to repair specified equipment after a malfunction. The fixed service fee is based on the expected number of malfunctions, but it is uncertain whether a particular machine will break down. The malfunction of the equipment adversely affects its owner and the contract compensates the owner (in kind, rather than cash). Another example is a contract for car breakdown services in which the provider agrees, for a fixed annual fee, to provide roadside assistance or tow the car to a nearby garage. The latter contract could meet the definition of an insurance contract even if the provider does not agree to carry out repairs or replace parts. |
| A2.7 | Applying the FRS to the contracts described in paragraph A2.6 is likely to be no more burdensome than applying FRS 102 if such contracts were outside the scope of this FRS: |
| (a) | There are unlikely to be material liabilities for malfunctions and breakdowns that have already occurred. |
| (b) | If Section 23 Revenue of FRS 102 applied, the service provider would recognise revenue by reference to the stage of completion (and subject to other specified criteria). That approach is also acceptable under this FRS, which permits the service provider to continue its existing accounting policies for these contracts unless they involve practices prohibited by paragraph 2.13. |
| (c) | If this FRS did not apply to these contracts, the service provider would apply Section 21 Provisions and Contingencies of FRS 102 to determine whether the contracts are onerous. |
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