OSFI’s IFRS conversion guidelines address structured settlements

The Office of the Superintendent of Financial Institutions (OSFI) has issued draft accounting guidelines related to IFRS conversion, including guidelines for structured settlements.
The full guidelines are available at:
http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=3698
In Bulletin D-5, OSFI issues guidelines on the reporting by a property and casualty insurer of an annuity when purchased for a structured settlement contract with a claimant.
“The main issues relate to whether the P&C insurer (a) continues to recognize a financial liability to a claimant and (b) recognizes a financial asset as a result of purchasing the annuity,” OSFI notes in the introduction to its guidelines.
In discussing how to handle the issue, OSFI notes two types of structured settlements.
In Type 1 structured settlements, an insurer purchases an annuity and is named the owner. There is an irrevocable direction from the P&C insurer to the annuity underwriter to make all payments directly to the claimant. This type of annuity is non-commutable, non-assignable and non-transferable.
In these situations, OSFI notes, a “P&C insurer should not continue to recognize an insurance liability to the claimant.”
Accordingly, the bulletin adds, the P&C insurer should not recognize the [Type 1] annuity as a financial asset.
In a Type 2 settlement, however, the financial liability of the P&C insurer to the claimant has not been extinguished legally or in substance because, in this scenario, the annuity is commutable, assignable or transferable. Unlike in Type 1 settlements, in Type 2 settlements there is no irrevocable direction by the insurer to make all the payments directly to the claimant.
In Type 2 situations, therefore, the insurer “should recognize the annuity as a financial asset on its statement of financial position since it retains the right to commute, assign or transfer the benefits of the structure.” The insurer has not surrendered control of the benefits to the claimant.
Therefore, “the annuity should be carried initially at its cost to the P&C insurer and the liability balance should be measured in the same manner as other outstanding claims liabilities of similar type,” OSFI says. “The asset and liability balances should not be offset as per IFRS 4 (Paragraph 14(d)).”