Ind AS 104 corresponds to IFRS 4 (Phase I). It was designed as an interim standard, allowing entities to continue most existing insurance accounting practices while the IASB developed IFRS 17 (the comprehensive insurance contracts standard). In India, IRDAI (Insurance Regulatory and Development Authority) continues to regulate insurance accounting in parallel with Ind AS.
Key characteristics of Ind AS 104:
An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
The critical question: Does the contract transfer significant insurance risk? A contract has significant insurance risk if a covered event could cause the insurer to pay significantly more in some scenarios than in others.
| Contract Type | Insurance Risk? | Standard |
|---|---|---|
| Term life insurance | Yes — death benefit significantly exceeds premium | Ind AS 104 |
| Fire insurance, motor insurance | Yes — claim could dwarf premiums collected | Ind AS 104 |
| Unit-linked insurance plan (ULIP) | May have — only the mortality risk component | Unbundle: insurance portion → Ind AS 104; investment → Ind AS 109 |
| Pure endowment policy | Depends — if no death/morbidity risk, may be purely financial | Ind AS 109 if no significant insurance risk |
| Fixed deposit at bank | No insurance risk | Ind AS 109 |
Ind AS 104 applies to:
It does NOT apply to: policyholders' financial statements, product warranties by manufacturers (Ind AS 37), employment benefit plans (Ind AS 19), or financial guarantee contracts (Ind AS 109, unless specifically elected to apply Ind AS 104).
Some insurance products (especially ULIPs and participating policies) contain both insurance risk and deposit/investment components bundled together. Ind AS 104 requires unbundling when:
DPF refers to a contractual right to receive additional benefits that are at the insurer's discretion — typically bonus declarations in participating life insurance policies (with-profit policies). Indian traditional life insurance plans (like LIC's participating endowment plans) commonly have DPF.
Under Ind AS 104, entities may classify DPF as:
Ind AS 104 requires insurers to perform a Liability Adequacy Test (LAT) at each balance sheet date to assess whether insurance liabilities are adequate. The LAT compares the carrying amount of insurance liabilities (net of deferred acquisition costs and intangible assets) against current estimates of future cash flows from the contracts.
If carrying amount is DEFICIENT: The deficiency must be recognized immediately in P&L — an additional liability is created. The insurer cannot smooth this over multiple periods.
If carrying amount is ADEQUATE: No adjustment needed. The insurer may (but need not) recognize any surplus.
| Component | Included in LAT? |
|---|---|
| Future premiums to be received | Yes |
| Future claims payments | Yes (as outflow) |
| Claims handling expenses | Yes (as outflow) |
| Policy surrender values | Yes |
| Expected investment returns on premiums held | Yes (permitted) |
| Deferred acquisition costs | Considered (netted) |
Reinsurance contracts held (where the company is the cedant) are accounted for separately from direct insurance contracts — assets and liabilities cannot be offset.
LIC is the largest insurer in India with ~65% market share. Its financial statements under Ind AS 104 illustrate key complexities:
Star Health, India's largest standalone health insurer, demonstrates non-life insurance accounting:
HDFC Life's mixed product portfolio (traditional + ULIP + term) requires careful unbundling:
Yes — Ind AS 104 applies to both life and general (non-life) insurance companies in India, provided they are required to prepare Ind AS financial statements. This includes listed insurance companies and those meeting the Ind AS applicability thresholds set by MCA.
However, there is a practical complexity: IRDAI-regulated insurers must ALSO prepare regulatory financial statements in IRDAI's prescribed format. The two sets of financial statements co-exist — the IRDAI format for solvency/regulatory reporting, and the Ind AS financial statements for investor/capital market reporting.
For general insurance, key Ind AS 104 issues include: (1) Unearned Premium Reserve (UPR) — recognizing premium revenue only for the expired portion of coverage; (2) IBNR (Incurred But Not Reported) reserves — actuarially estimated; (3) LAT — testing adequacy of combined UPR and outstanding claims reserves; (4) Reinsurance assets — gross presentation required.
Ind AS 117 (when notified) will fundamentally transform insurance accounting. Key changes from Ind AS 104:
1. General Measurement Model (GMM): Insurance liabilities measured at current value using current estimates of cash flows (not historical premium-based reserves), plus a risk adjustment, plus a Contractual Service Margin (CSM) representing unearned profit.
2. No more premium revenue: Premiums received are NOT recognized as revenue upfront — the "insurance revenue" is recognized as services are provided over the coverage period. This will dramatically reduce reported revenues for life insurers.
3. Contractual Service Margin (CSM): Profit embedded in new contracts is not recognized at inception — it's deferred in the CSM and released to P&L as insurance services are delivered. This eliminates "day-1 profits."
4. Variable Fee Approach (VFA) for participating contracts: Special model for with-profit/DPF contracts like LIC's participating plans — insurer shares in investment returns.
5. Premium Allocation Approach (PAA): Simplified model for short-duration contracts (motor, health, fire) — similar to current practice for most general insurance, so less disruptive for non-life insurers.
The impact on P&L and equity at transition is expected to be significant. IRDAI and ICAI are working on the Indian version — timeline for mandatory adoption in India is not yet confirmed as of June 2025.
The LAT is effectively a "sufficiency check" on insurance reserves. Here's how it works in practice:
Step 1 — Carrying Amount: Sum up all insurance liabilities (unearned premium reserve, outstanding claims, IBNR, policy reserves) net of deferred acquisition costs and related intangible assets.
Step 2 — Current Best Estimate: Calculate the present value of future cash flows expected from existing contracts — future claims, expenses, and expected future premiums. This is done by the Appointed Actuary using current assumptions (mortality, morbidity, expenses, investment returns).
Step 3 — Compare: If carrying amount ≥ current best estimate → liabilities are adequate → no adjustment needed. If carrying amount < current best estimate → deficiency → recognize the shortfall immediately in P&L.
Practical example: During COVID-19 (FY21-22), health insurers saw claim experience far exceed assumptions. LAT showed deficiencies — several insurers had to increase their IBNR and outstanding claims reserves, directly charging P&L. Star Health and other health insurers reported higher claims ratios and some had to increase reserves specifically due to LAT requirements.
The LAT must be performed using current assumptions — an insurer cannot use original pricing assumptions if experience shows they are no longer appropriate.