Page 38 - The Insurance Times August 2022

a bundled product, where all its different components are
treated uniformally, make those results incomparable with
the results of other organisations which treat similar
components under some other IFRSs (9 or 15).

Hence a need for separation of the components was felt and
the standard prescribes separation of following components
of bundled insurance contracts / products so that they are
subjected to a treatment appropriate to the nature of the
respective components. The standard also provides some
instances where such un-bundling may not be required.
Bundling of following categories is very common.

offered as part of accident benefit. In the latter case
a. Embedded Derivatives : When a contract's cashflows
no separation is needed.) Health check up portion,
are driven by changes in a variable such as interest rate,
where health check up expenses are reimbursed under
commodity price or an index, the contract represents
health insurance policy and extended maintenance
a derivative. Such derivatives can be of two types - stand
warranty under motor insurance policies are the other
alone derivatives and embedded derivatives. In case
candidates for consideration under this provision. Life
of an embedded derivative, there is a non-derivative
Insurance contract offering death benefit along with
host contract with which a derivative contract is
account balance is a common example from the life
integrated. A catastrophe trigger where the trigger is
sector.
defined as a financial variable such as dropin designated
stock market is an example of such derivative from non-
The preceding paras dealt with un-bundling of non-insurance
life sector, and death benefits linked to an equity prices
component from insurance contract. Many times products
or equity index represents such derivative from the life
are designed by combining different insurance components
sector.
which belong to different portfolios (Package policies found
in non-life sector). Is it necessary to unbundle them ? The
b. Separable Distinct Investment Component :
standard seems to suggest unbundling, where combination
Investment component is payable / repayable under all
is a matter of mere administrative convenience or
circumstances - Maturity, Death, Surrender including
components are priced separately they may have to be
insured event as against the insurance component
separated.
which is payable only on the happening of insured
event. Where investment component is bundled with
2. Contractual Service Margin (CSM)
insurance component the investment component has
The Contractual Service Margin is the most important
to be segregated. ULIP is the best example of insurance
product with investment component. In non-life concept of IFRS 17 that drives several other provisions of
segment Bhavishya Arogya Policies, Longterm Motor the standard. Where the services are rendered over a /multi
year / long period, recognition of profits arising from such
Insurance Policies and Longterm Fire Insurance Policies
services, naturally, has to be over the entire service period.
have to be scrutinised to examine the investment
The standard has attempted to achieve this objective of
components in them. However as per the provisions of
spreading the profits over the service period by introducing
the standard, If the components are closely
the concept of Contractual Service Margin. It is a new
interrelated and intertwined, separation is not
required. concept developed to prevent the possibility of up front
recognition of profits on contracts where services are
c. Non Insurance Goods and Services : Claim processing rendered over a multi year / long period.
services under stop loss health policies is an example of
bundling of non-insurance service with insurance In contrast to this dictate of spreading the profits over the
service. Road Side Assistance Services along with Motor period over which services are rendered, the same the
Insurance is another example. (Roadside assistance may financial principle of prudence and conservatism dictates,
be provided when a vehicle has a mechanical immediate recognition / accounting of loss if any.
breakdown which is not an accident. It may also be Contractual service margin represents the unearned profit
38 The Insurance Times, August 2022