Contract boundary is the criteria to identify when the existing contract ends and a new contract begins. Cash flows within the boundary will be taken considered for the measurement as per IFRS 17. If there is no annual renewals, the contract boundary will be same as term of the policy, if the contract is under annual renewal terms, it requires to analyze and identify the relevant boundary for the contract.

When there is a guaranteed renewability Insurer has option to re-new the policy without being re-underwritten. As per IFRS 17 Insurers obligation ends when insurer has practical ability re-assess the risks and reprice the policy or the portfolio and same trigger the contract boundary. When a respective policy is reassessed and repriced, it requires to identify as a new contract.

It requires to pay more attention on life insurance policies to identify the contract boundary, mostly life covers are more than one year by their nature. Assume that an insurer issues death cover and it is guaranteed renewable for 25 years without considering changes of insured’s health condition. If the insurer has ability to increase premium rates with the age of the policyholder. Meaning of guaranteed renewability is insurer has substantive obligation to provide insurance cover, however when the insurer has ability to reprice at the end of each year, these substantive obligation ends each year and contract boundary will be limited to one year.

If the same above contract issued with same annual premium and with guaranteed renewable terms keeping a same annual premium amount. Contract boundary for the policy is 25 years and not one year. The reason is Risk is not reassessed annually and not repriced annually. Also, since the insurer has kept an equal annual premium, insurer has over charged during initial years and under charged during latter years. Initial years over charges are to cover the higher risks of latter years.

What is the actual impact?

Some cash flows which are considered earlier for the measurement of the contract will be not be considered for the measurement due contract boundary concept. CSM will be changed when cash flows are including or excluding. At initial recognition, CSM will be estimated based on expected cash flows, when some cash flows are out of the contract boundary, those will not be considered for CSM calculation. When contracts renewed with incremental values, these will be considered as new contracts under new cohort when received incremental cash flows and new CSM will be recognized accordingly.

Teran Prasanna ACA (ICAEW-UK), FCA, CPA, Bsc (Accounting)