Acquiring

insurance
contracts
Transfers of insurance contracts
and business combinations under
IFRS 17 and IFRS 3
—
kpmg.com/ifrs
March 2024
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

Acquiring insurance contracts

What’s the issue? What’s the impact? What’s next?

A company may acquire insurance contracts either Companies may need to account for insurance contracts • Identify all relevant data related to recent and
via a transfer or via a business combination in the with similar characteristics differently. This is because it planned acquisitions and assess the information
scope of IFRS 3 Business Combinations or under needs to assess them at different dates depending on you have available.
common control. whether they are acquired or issued.
• Assess your systems and processes to ensure they
Under IFRS 17 Insurance Contracts, a company An acquired contract may also no longer be in the scope can support the accounting requirements.
needs to assess insurance contracts acquired as at of IFRS 17 and may need to be accounted for under
• Educate stakeholders on the financial reporting
their date of acquisition, not their date of inception another accounting standard – e.g. IFRS 9 Financial
impacts when preparing for recent and future
(or previous modification). Instruments.
transfers of insurance contracts or business
This applies for all contracts acquired via a If a company acquires contracts through acquiring a combinations.
business combination within the scope of IFRS 3 or contract-issuing subsidiary, then the acquirer reassesses
• Involve specialists: transfers of insurance contracts
a transfer. the contracts as at the date of acquisition. Consequently,
or business combinations are often unique and
measurement differences between the parent and
complex.
subsidiary may arise and cause a dual contractual
service margin (CSM).

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2
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

Overview
Under IFRS 17, a company assesses insurance contracts acquired as at their date of acquisition.

Does acquiring contracts

No
qualify as a business
combination?

Yes

Is the business combination

under common control?
No
Yes

Account for as business

Account for as a business
combination under common Account for as a ‘transfer’
combination under IFRS 3
control

Assess and measure all acquired contracts as at the date of acquisition

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3
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

Acquiring insurance contracts

Our guide sets out a step-by-step approach to accounting for acquired insurance contracts
under IFRS® Accounting Standards.

01 02 03 04 05
Does acquiring How are contracts Is the business How are contracts Acquired vs issued
contracts qualify as acquired in a combination under acquired via a contracts: How does
a business business common control? transfer measured? classification and
combination? combination measurement
measured? differ?

06 07 08 09 10
Acquired vs issued How is the fair value What if a parent Acquiring contracts What next?
contracts: of acquired acquires a – Illustration
Illustration contracts subsidiary that has
determined? issued contracts?

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4
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

01 Does acquiring contracts qualify as a business combination?

IFRS 17 contains new requirements for acquired contracts. However, IFRS 3
continues to govern whether the acquisition qualifies as a business
combination or a transfer. This first assessment drives the accounting under
Identifying a business combination
IFRS 17.

Under IFRS 3, the following tests are used to determine whether assets
acquired and liabilities assumed constitute a business. Optional A ‘substantive
‘concentration test’ process’ test
Optional ‘concentration test’ †

• Permitted test to assess whether a business may not exist.

Requirements Requirements Requirements Requirements
• Cannot alone determine that a business combination does exist. met not met not met met

‘Substantive process’ test

Asset/liability
acquisition Perform
• Test to determine whether a transaction is a business combination – Asset/liability Business
i.e. the activities and assets acquired comprise at least an input and a or can perform ‘substantive
acquisition combination
substantive process, which together significantly contribute to the ‘substantive process’ test
ability to create outputs. process’ test

What might constitute a substantive process?

Acquiring an organised workforce to manage the customer relationships and
underwriting process would generally meet the criteria in the substantive process
†
The optional concentration test looks at whether substantially all of the fair value of the gross assets test.
acquired is concentrated in a single asset or group of similar assets.

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5
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

02 How are contracts acquired in a business combination measured?

If the acquisition of contracts qualifies as a business
combination under IFRS 3, then an insurer determines the
identifiable assets acquired and the liabilities assumed as IFRS 3 accounting
part of the business combination, and recognises them
separately from goodwill as at the date of acquisition. • Use consideration received or paid as a proxy for premiums received.
Insurance
Insurance contracts are measured at their fair value as at contracts • Consideration is the fair value of the contracts as at the date of
their date of acquisition, which is treated as a proxy for acquisition.
premiums received. • Difference between the fulfilment cash flows and the consideration
Onerous insurance
received or paid (i.e. fair value) is part of the goodwill or gain on a
contracts
bargain purchase in profit or loss.

Loss recovery • Recognise as a reduction of goodwill or gain on a bargain purchase.

component (LRC) for
group of reinsurance • Calculate by multiplying the loss component of underlying insurance
contracts held contracts and the percentage of claims on the underlying contracts the
acquirer expects to recover.

Insurance • Recognise the following rights to obtain future insurance contracts at

acquisition cash flow fair value as at the date of the transaction:
(IACF) assets
• future contracts that are renewals of recognised contracts; and

• future contracts other than renewals, without paying IACFs that the
acquiree has already paid and that are directly attributable to the
related portfolio of insurance contracts.

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6
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

03 Is the business combination under common control?

Business combinations under common control (BCUCC) may also occur.
These are business combinations in which all of the combining companies or Example of a business combination under common control
businesses are ultimately controlled by the same party or parties both before
and after the combination. Each of P, S1, S2 and S3 are businesses. Control of S3 is transferred from
S1 to S2 (the receiving company). S2 and S3 (the combining businesses) are
BCUCC are not in the scope of IFRS 3, resulting in diversity in how the ultimately controlled by P before and after the transaction.
receiving company accounts for the transaction in its financial statements.

Some companies opt to use the acquisition method under IFRS 3; others use a
book-value method. Before the transaction After the transaction

Under IFRS 3, differences in classification and measurement arise between the

acquirer and acquiree's accounting.
P P

S1 S2 S1 S2

What if there is a transfer under common control?

For transfers of insurance contracts under common control – i.e. transfers S3 S3
that are not business combinations – the requirements of IFRS 17 apply.
However, any potential impacts of transactions with shareholders need to be
considered in determining the appropriate accounting.

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7
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

04 How are contracts acquired via a transfer measured?

Applying the concentration test to a transaction may
result in a ‘transfer' instead of a business combination.

Such transfers are measured at cost – i.e. the

Measuring contracts transferred
consideration received or paid for those contracts. • Use consideration received or paid for the contracts as a proxy for
premiums received (i.e. allocate consideration to the contracts based on
When a group of assets and/or liabilities are acquired their relative fair values).
together, the total cost is allocated to individual assets Insurance
and liabilities based on their relative fair values as at the contracts
• The premiums received are then used as input in the fulfilment cash flows
date of acquisition. at the date of acquisition to determine the contractual service margin
(CSM) of the group(s) of contracts.
No goodwill or gain on a bargain purchase arises on the
• Recognise the difference between fulfilment cash flows (if higher than
acquisition of an onerous insurance contract. Onerous insurance
consideration) and consideration received or paid (i.e. relative fair value)
contracts
as a loss immediately in profit or loss.

Loss recovery • Recognise the loss recovery component as income in profit or loss.
component for
group of reinsurance • Calculate by multiplying the loss component of underlying insurance
contracts held contracts and the percentage of claims on the underlying contracts the
acquirer expects to recover.

IACF assets • Recognise the following rights to obtain future insurance contracts at
What if the sum of individual fair values of fair value as at the date of the transaction:
identifiable assets and liabilities differs from the
transaction price in a transfer? • future contracts that are renewals of recognised contracts; and
In these cases, the IFRS Interpretations
• future contracts other than renewals, without paying again IACFs that
Committee’s November 2017 decision would apply the acquiree has already paid and that are directly attributable to the
to determine the initial measurement of the related portfolio of insurance contracts.
individual assets and liabilities.

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8
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

05 Acquired vs issued contracts: How does classification and measurement differ?

For contracts acquired in either a business combination under IFRS 3 or Classifying and measuring acquired contracts as at the date of acquisition
a transfer, how a company classifies and measures those contracts may can lead to significantly different outcomes for specific contract types, as
differ significantly under IFRS 17. follows.

Classifying and measuring

Originated contract
acquired contracts
• Issued by subsidiary • Assessed as at date of acquisition

• Classified and measured at inception • Not grouped with issued contracts

(or modification)
• Generally measured under the GMM* (including a
Short-term with long-tail
CSM on claims incurred but not yet settled) instead of
claims and in settlement
under the PAA*.

Example contract type

period (see overleaf)

Acquired contract Direct participating contract • Generally measured under the GMM instead of under
• Acquired by parent with little/no remaining the VFA*.
participation
• Classified and measured as
at date of acquisition
Includes significant • Classified and measured under applicable IFRS
insurance risk at inception Accounting Standards – e.g. under IFRS 9 instead of
that no longer exists IFRS 17.

* General measurement model; premium allocation approach; variable fee approach

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9
Overview
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

06 Acquired vs issued contracts : Illustration

Fact pattern J assesses the contracts it acquires as at the date of acquisition and
determines the following.
Company J has a group of short-term contracts with long-tail claims in
their settlement period, for which it has recognised a liability for incurred
• 15-year coverage period: J expects to discover the ultimate claims amount
claims. These contracts are one-year-coverage liability insurance
after 15 years.
contracts. J issued these contracts five years ago and so the coverage
period for these contracts has now expired. • GMM applies: The acquired contracts are unlikely to be eligible for the PAA,
due to the significant length of the time until the ultimate discovery of the claims
J acquires a group of similar contracts that were also issued five years
amount is expected.
ago.
• CSM: J calculates this under the GMM.
J determines the coverage period for the contracts acquired based on
the claims development period starting from the date of acquisition. For • Insurance revenue: J recognises insurance revenue over 15 years for the
the purpose of this example, assume that J expects this to be 15 years acquired contracts, reflecting the consideration received to assume those
from that date. contracts and the amount that J expects it will need to settle the claims acquired,
excluding any investment component.

• Changes in estimates: Changes in claims development for the contracts

acquired may adjust future profitability via changes in the CSM.

Recognising a CSM for claims acquired in their settlement period

Calculating the CSM may be challenging for some companies if they have
inadequate systems in place. This applies especially if, before an acquisition,
all
*
originated contracts qualified for the PAA and therefore no CSM
calculation systems were required for measurement.

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10
*
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

07 How is the fair value of acquired contracts determined?

Acquired insurance contracts are measured at their fair value as at their date The contracts may be in an asset or a liability position when acquired. Different
of acquisition, which is treated as a proxy for premiums received. requirements apply as follows, depending on the contract’s position.

Fair value is defined in IFRS 13 Fair Value Measurement* as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
Determine valuation approach under IFRS 13
transaction between market participants.
(Market approach, income approach or cost approach)
Of the three approaches mentioned under IFRS 13, insurers generally apply an
income approach. This is because of the absence of quoted prices in an
active market for identical contracts or groups of contracts. Asset position Liability position

Under the income approach, an insurer needs to apply judgement to determine

the inputs and assumptions that a market participant† would use to price the
Identical item held by
contracts being valued, and the profit margin they would demand for taking on No identical item held
another party
the contracts. Due to its complexity and requirement for significant judgement,
involvement of actuarial or valuation specialists may be necessary.
Measure based on Measure the fair value Measure using a
price that would be from the perspective of valuation technique
received in a sale to a a market participant from the perspective of
market participant as at holding the identical a market participant
the measurement date item as an asset owing the liability

How is the fair value of an acquired reinsurance contract determined?

The fair value of an acquired reinsurance contract in an asset position * IFRS 13 is applied, except for the requirement that the fair value of a financial liability with a demand feature
needs to be consistent with the perspective of a market participant that has cannot be less than the amount payable on demand.
issued the same underlying insurance contracts covered by the reinsurance † A company excludes the value of expected future renewals that are outside the boundaries of the contract.

contract held. This ensures consistency with the requirements for measurement of the fulfilment cash flows and the CSM.
Differences may arise in other areas (e.g. allocated expenses, risk).

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Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

08 What if a parent acquires a subsidiary that has issued contracts?

If a parent company acquires a subsidiary that has previously issued insurance
contracts, then:

• the subsidiary will continue to apply the general requirements of IFRS 17 to

its insurance contracts; and
Acquired contract
• the parent company will apply the specific requirements for insurance
contracts acquired as at the date of acquisition.
P1 P2 • Acquired by parent
• Classified and measured as at date
of acquisition
This means that these contracts may be classified and measured differently in
the consolidated financial statements and subsidiary’s financial statements.
Originated contract
These differences may be significant, requiring additional explanation to
stakeholders. S4 S4 •
•
Issued by subsidiary
Classified and measured as at date
P2 acquires
Company S4 of inception (or modification)
from P1

Is a dual CSM required?

Usually yes. A dual CSM applies when the measurement of the CSM for the
same group of insurance contracts differs between the parent and the
subsidiary. It is likely that the classification could change upon acquisition,
which will also impact the CSM measurement. This will impact group data and
system requirements and may require explaining to stakeholders.

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12
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

09 Acquiring contracts: Illustration

Fact pattern
C calculates the CSM of the acquired contracts as follows.
• On 31 December 2024, Company C acquires, among other assets
and liabilities, a group of insurance contracts that have been in Amount
force for 10 years.
Insurance contract liability at fair value 30
• C determines that the acquisition is a business combination.
Fulfilment cash flows 20
• The fair value of the liability for these contracts at the transaction
date is 30. On the date of acquisition, C estimates that the fulfilment Contractual service margin 10
cash flows are 20.

• Although the contracts have been in force for 10 years, C initially

recognises and measures them as if they had been issued on C records the following consolidation entries as at the date of acquisition.
31 December 2024. This is because IFRS 3 requires that they are
assessed as at their date of acquisition.
Debit Credit
• Assume the following:
Goodwill 40
• The fair value of investments is 40.
Intangible assets 20
• The fair value of intangible assets identified on acquisition Investments 40
is 20.
IACF assets 10
• The fair value of IACF assets is 10.
Insurance contract liability on initial recognition 30
• The consideration paid for the business combination is 80,
which is financed by bank borrowings. Bank borrowings 80

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13
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

10 What next?

Identify Assess systems Plan for reporting Involve

acquisitions and processes changes specialists

… because acquiring contracts

… including identifying the date … to ensure they can … including educating
can often be complex, require
of acquisition and the accommodate accounting for stakeholders on the financial
significant judgement and
information available for these contracts – e.g. being impacts of IFRS 17 when
involve unique challenges.
determining how to account for able to maintain separate sets preparing for future transfers of
Ensure that the appropriate
the transaction. of records (i.e. a dual CSM) for insurance contracts or
specialists are involved.
subsidiary and group reporting. business combinations.

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14
Overview Does acquiring How are contracts Is the business How are contracts Acquired vs issued contracts: Acquired vs issued How is the fair value What if a parent acquires Acquiring What Keeping
.
contracts qualify as a acquired in a business combination under acquired via a How does classification and contracts: Illustration of acquired contracts a subsidiary that has contracts: next? in
business combination? combination measured? common control? transfer measured? measurement differ? determined? issued contracts? Illustration touch

Keeping in touch
Follow ‘KPMG IFRS’ on LinkedIn or visit kpmg.com/ifrs for the latest news.
Joachim Kölschbach Whether you are new to IFRS Accounting Standards or a current user, you can
Global IFRS Insurance Contracts Leader find digestible summaries of recent developments, detailed guidance on complex
KPMG in Spain requirements and practical tools such as illustrative disclosures and checklists.
[email protected]
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Global IFRS Insurance Contracts

Deputy Leader
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Uncertain times |
[email protected] insurers | Guide to annual
Financial reporting
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resource centre
IFRS 17 and IFRS 9

Peter Carlson
Global IFRS Business Combinations
Leader and IFRS Insurance Contracts IFRS 9 for insurers | Climate change |
Are you good to go? | Financial reporting
Deputy Leader Application guidance resource centre
KPMG International
[email protected]

With thanks to our additional contributors First Impressions |

Trevor Gibbons Julia LaPointe Chris Spall Insurance contracts 2020 Sustainability reporting
edition | IFRS 17
Gina Desai

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Publication name: Acquiring insurance contracts

Publication number: 137864
Publication date: March 2024
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