An oddity in Insurance Law
Concrete slab triggers lawsuit
A large slab of concrete in the middle of a street has caused Manitoba
Public Insurance (MPI) to launch a lawsuit against the City of Winnipeg.
Substantial damage occurred to a man’s BMW when he drove it into
the 18-centimetre-high, mattress-sized chunk of concrete, according to
CBC.ca. MPI claims that the slab “protrudes excessively.” Drivers have
allegedly knocked over the warning sign with their cars many times and
their vehicles have even become stuck on top of the concrete slab. MPI
will likely have to pay for repairs to the BMW if the city won’t.
Why the concrete slab was placed in the middle of the road in the first
place remains a mystery. — Natalie Fraser
CHRISTIAN DE GRANDMAISON / DREAMSTIME.COM
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Contracts must involve
transfer of significant
insurance risk
LUIS MILLAN
When the federal Department of Finance introduced new
transitional measures just
before the holidays last December, it was welcome relief for life
insurers coming to grips with a
new standard introduced by the
International Accounting Standards Board (IASB).
The new standard, intended
to improve financial disclosure,
recognition and measurement
criteria for insurance contracts,
introduces a universal definition
of an insurance contract that
came into effect as of Jan. 1.
Thanks to this new definition,
insurance contracts must, under
International Financial
Reporting Standards (IFRS) 4,
involve the transfer of significant insurance risk to be considered as insurance contracts.
Otherwise, they could be
deemed to be either investment
contracts or service contracts.
IFRS 4 is part of a two-phase
approach adopted by the
independent, privately-funded
accounting standard-setter
based in London, England
toward the issuance of accounting standards for insurance contracts. A more comprehensive
standard is currently under
development. In July 2010, the
IASB issued a contentious
exposure draft for a revised
comprehensive standard for
insurance contracts, which
according to Canada’s life insurance industry, could significantly change insurance
accounting and potentially have
a negative impact on the quarterly results of Canadian insurers—and it may affect their
ability to sell certain long-term
investments.
A final standard is expected
to be issued in mid-2011 and be
in effect in 2013 at the earliest.
“There’s a lot of pressure to
make sure that the IASB get it
right, rather than just rush to
get a standard done within an
artificial time period,” said one
life insurance expert regarding
the controversial exposure draft.
In the meantime, though, life
insurers are adjusting to the
consequences of the new defin-
ition of life insurance contracts.
“Where the first phase of IFRS 4
seems to have had the most
important impact, at least for
Canadian insurers, is in situa-
tions where arrangements pre-
viously considered as insurance
contracts are now more or less
carved out of that definition,
and are essentially considered to
be more in the nature of deposit
liabilities,” explained Jason
Swales, a lawyer and partner in
the tax services practice of Price-
waterhouseCoopers LLP in
Toronto. “The industry was
quite keen to have Canada’s
Department of Finance put new
rules in place so that they’re
seen in an enacted form prior to
the beginning of 2011 when
IFRS was effective.”
Approximately 10 per cent of
Canadian life insurance con-
tracts will be affected by the new
definition, and will now be con-
sidered as either investment or
service contracts, according to
the Canadian Life and Health
Insurance Association Inc.
well as this change to the assets
that underlie the reserves—and
both of these items have a consequential impact on tax, which
were addressed by the legislation” recently introduced by Canada’s Department of Finance.
Yet if past history is anything
to go by, even though the Department of Finance introduced
legislation that will address certain adverse consequences on
adoption of IFRS, it will still
take some time before all the
kinks are worked out. When the
finance department changed the
tax rules that applied to financial
institutions and insurers due to
the introduction of Handbook
3855 of the Canadian Generally
Accepted Accounting Principles
(GAAP), which changed the
accounting for investments, it
took the finance department
several years to actually finalize
the rules, leaving “companies in
“
Approximately 10 per cent of Canadian life
insurance contracts will be affected by the
new definition, and will now be considered
as either investment or service contracts...
The new definition will have
an impact. The reclassification
of life insurance policies as
investment or service contracts
could have a significant effect on
a life insurer’s actuarial liabilities, said Swales. Moreover, the
actuarial liabilities could be
affected by changes to the treatment of assets supporting insurance liabilities on the adoption
of IFRS, added Swales. In other
words, the way that actuarial
reserves are determined in
accordance with methodologies
used under the current Canadian system is “somewhat
dependent” on the value of
assets that underlie or support
those insurance reserves. With
the adoption of IFRS, those
assets may now be required to
be valuated at fair value as
opposed to amortized cost.
“Think of a pool of assets that
are supporting the insurance lia-
bilities,” said Swales. “If all of a
sudden we’re valuing those assets
in a different way, at fair value,
then that’ll have a corresponding
impact on the insurance reserves
as well. So there’s really two
issues—the change in the defin-
ition of the insurance contract, as
an unenviable position” of hav-
ing to prepare their accounts
based on the old and new legis-
lation, all of which “created
additional work and more uncer-
tainty.”
While the details of the chan-
ges imposed by IFRS 4 are
clearly in the domain of account-
ants, Swales advises commer-
cial, corporate and tax lawyers
to polish up, or at least acquaint
themselves, with the new IFRS
insurance contract standard.
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