| A2.18 | The following are examples of contracts that are insurance contracts, if the transfer of insurance risk is significant: |
| (a) | Insurance against theft or damage to property. |
| (b) | Insurance against product liability, professional liability, civil liability or legal expenses. |
| (c) | Life insurance and prepaid funeral plans (although death is certain, it is uncertain when death will occur or, for some types of life insurance, whether death will occur within the period covered by the insurance). |
| (d) | Life-contingent annuities and pensions (ie contracts that provide compensation for the uncertain future event – the survival of the annuitant or pensioner – to assist the annuitant or pensioner in maintaining a given standard of living, which would otherwise be adversely affected by his or her survival). |
| (e) | Disability and medical cover. |
| (f) | Surety bonds, fidelity bonds, performance bonds and bid bonds (ie contracts that provide compensation if another party fails to perform a contractual obligation, for example an obligation to construct a building). |
| (g) | Credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. These contracts could have various legal forms, such as that of a guarantee, some types of letter of credit, a credit derivative default contract or an insurance contract. However, although these contracts meet the definition of an insurance contract, they also meet the definition of a financial guarantee contract in FRS 102 and are within the scope of Section 21 of FRS 102, not this FRS (see paragraph 1.7(d)). Nevertheless, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may elect to apply either Section 21 of FRS 102 or this FRS to such financial guarantee contracts. |
| (h) | Product warranties. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of this FRS. However, product warranties issued directly by a manufacturer, dealer or retailer are outside its scope, because they are within the scope of Sections 21 and 23 of FRS 102. |
| (i) | Title insurance (ie insurance against the discovery of defects in title to land that were not apparent when the insurance contract was written). In this case, the insured event is the discovery of a defect in the title, not the defect itself. |
| (j) | Travel assistance (ie compensation in cash or in kind to policyholders for losses suffered while they are travelling). Paragraphs A2.6 and A2.7 discuss some contracts of this kind. |
| (k) | Catastrophe bonds that provide for reduced payments of principal, interest or both if a specified event adversely affects the issuer of the bond (unless the specified event does not create significant insurance risk, for example if the event is a change in an interest rate or foreign exchange rate). |
| (l) | Insurance swaps and other contracts that require a payment based on changes in climatic, geological or other physical variables that are specific to a party to the contract. |
| (m) | Reinsurance contracts. |
| A2.19 | The following are examples of items that are not insurance contracts: |
| (a) | Investment contracts that have the legal form of an insurance contract but do not expose the insurer to significant insurance risk, for example life insurance contracts in which the insurer bears no significant mortality risk (such contracts are non-insurance financial instruments or service contracts, see paragraphs A2.20 and A2.21). |
| (b) | Contracts that have the legal form of insurance, but pass all significant insurance risk back to the policyholder through non-cancellable and enforceable mechanisms that adjust future payments by the policyholder as a direct result of insured losses, for example some financial reinsurance contracts or some group contracts (such contracts are normally non-insurance financial instruments or service contracts, see paragraphs A2.20 and A2.21). |
| (c) | Self-insurance, in other words retaining a risk that could have been covered by insurance (there is no insurance contract because there is no agreement with another party). |
| (d) | Contracts (such as gambling contracts) that require a payment if a specified uncertain future event occurs, but do not require, as a contractual precondition for payment, that the event adversely affects the policyholder. However, this does not preclude the specification of a predetermined payout to quantify the loss caused by a specified event such as death or an accident (see also paragraph A2.13). |
| (e) | Derivatives that expose one party to financial risk but not insurance risk, because they require that party to make payment based solely on changes in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, 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 (see FRS 102). |
| (f) | A credit-related guarantee (or letter of credit, credit derivative default contract or credit insurance contract) that requires payments even if the holder has not incurred a loss on the failure of the debtor to make payments when due. |
| (g) | Contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract (commonly described as weather derivatives). |
| (h) | Catastrophe bonds that provide for reduced payments of principal, interest or both, based on a climatic, geological or other physical variable that is not specific to a party to the contract. |
| A2.20 | If the contracts described in paragraph A2.19 create financial assets or financial liabilities, they are within the scope of Sections 11 Basic Financial Instruments and 12 Other Financial Instruments Issues of FRS 102. Among other things, this means that the parties to the contract use what is sometimes called deposit accounting, which involves the following: |
| (a) | one party recognises the consideration received as a financial liability, rather than as revenue; and |
| (b) | the other party recognises the consideration paid as a financial asset, rather than as an expense. |
| A2.21 | If the contracts described in paragraph A2.19 do not create financial assets or financial liabilities, Section 23 of FRS 102 applies. Under Section 23 of FRS 102, revenue associated with a transaction involving the rendering of services is recognised by reference to the stage of completion of the transaction if the outcome of the transaction can be estimated reliably. |
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