IFRS 17 introduces the contract boundary concept to identify the cash flows which are relevant to measure the insurance contracts. Contract boundary distinguishes cash flows related to the existing insurance contracts from future contracts. When the insurance company has a substantive rights and obligations towards policyholders, cash flows that arise from those rights and obligations are within the contract boundary which will be considered for the measurement of respective group of contracts.

IFRS 17 specifies that substantive obligations of the insurer will end when the insurer has practical ability to reassess the risks and reprice the contract.   When there is a guaranteed annual renewal and if the Insurer has an ability to reassess the risks, which results a repriced premium. The entities need to analyze all the related terms and conditions of the contract to identify the contract boundary

There is an opportunity to become the contract boundary limited to one year, though these contracts are identified as one long-term contracts as per current practice. Cash flows pertains to one legal contract will be recognized as different contract groups due to the contract boundary concept as per IFRS 17.

When cash flows from one contract are identified as different group of contracts due to the contract boundary, Contractual service margin will be adjusted accordingly. It will raise variances in annual profitability with current financial reporting as per IFRS 4 and reporting under IFRS 17.

Insurers require to analyze existing contracts and should identify the contract boundary to evaluate the necessity for separation of contracts. This needs a significant change in systems and processes and early attention is required.

Teran Prasanna   ACA (ICAEW), FCA, CPA, BSc (Accounting)