- Type of Publication: Guideline
- Category: Accounting
- Date: April 1998
- Revised: July 2010
- No: D-5
- Audiences: P&C
This guideline addresses the accounting and reporting by a property and
casualty insurance enterprise (P&C insurer) of an annuity when
purchased for a structured settlement contract and of the associated
financial liability. 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. The
guideline also provides guidance with respect to the application of IFRSs
The Canadian Council of Insurance Regulators (CCIR) currently provides
direction for the reporting of structured settlements in Section IV of its
Annual Return Instructions. This guideline provides guidance to P&C
insurers in applying that direction within the context of these accounting
of a structured settlement:
The term "structured settlement" as used by a P&C insurer refers to a
contractual arrangement whereby a third party makes periodic payments to a
claimant of the P&C insurer. The periodic payments are normally funded
through purchase by the P&C insurer of an annuity from a life
insurance enterprise and are usually arranged so that the payments are tax
free in the hands of the claimant. Structured settlements have been used
to pay claimants pursuant to both tort actions and no-fault claims.
There are essentially two types of structured settlements. They are
defined as follows:
Type 1 structured settlements have the following characteristics:
An annuity is purchased by a P&C insurer who is named as the
owner. There is an irrevocable direction from the P&C insurer to
the annuity underwriter to make all payments directly to the claimant.
Since the annuity is non-commutable, non-assignable and
non-transferable, the P&C insurer is not entitled to any annuity
payments and there are no rights under the contractual arrangement
that would provide any current or future benefit to the P&C
The P&C insurer is released by the claimant to evidence settlement
of the claim amount.
- The P&C insurer remains liable to make
payments to the claimant in the event and to the extent the annuity
underwriter fails to make payments under the terms and conditions of
the annuity and the irrevocable direction given.
Type 2 structured settlements differ from Type 1 in that:
The annuity is commutable or assignable or transferable, that is,
there is some form of reversionary interest or continuing right to a
benefit for the P&C insurer.
A legal release is not necessarily obtained from the claimant.
The commutation rights of the P&C insurer have the potential for
terminating the claimant's right to future payments in advance of the
annuity being exhausted.
The extent of the rights held by the P&C insurer sometimes indicates
the P&C insurer has contracted with the annuity underwriter to provide
only administrative services with respect to the periodic payments.
Type 2 structured settlements have typically been arranged to pay no-fault
benefits, such as weekly disability payments. Descriptions used in the
market place include "pure no-fault annuities" and "reinsurance
annuities." However, the terminology "reinsurance" does not appropriately
convey the nature of the contractual arrangement.
Derecognition of financial liability and annuity
Under a Type 1 structured settlement arrangement, a P&C insurer should
not continue to recognize an insurance liability to the claimant once the
P&C insurer purchases a non- commutable, non-assignable and
non-transferable annuity to settle the liability and obtains a release
from its direct (primary) obligation to the claimant. The irrevocable
direction of the annuity cash flows to the claimant and the legal release
extinguish the liability.
Accordingly, the P&C insurer should not recognize the annuity as a
financial asset. The P&C insurer who is the named annuitant has no
rights to any of the benefits from the annuity since these rights
including the cash flows have been irrevocably transferred or assigned to
the claimant. The release and irrevocable direction counters and negates
any argument based on the legal ownership of the annuity.
The P&C insurer, however, assumes a financial guarantee obligation of
the annuity underwriter in the event of any default or other failure of
the annuity underwriter to make contracted payments to the claimant. It is
therefore secondarily liable to the claimant for the annuity payments.
Any gain or loss should be recorded in income as an adjustment of incurred
The P&C insurer also should not recognize a financial asset at time of
purchase where the terms of the annuity make it commutable in the event
the liability to the claimant becomes fully settled or otherwise
discharged, e.g., the claimant dies and the annuity residual reverts to
the P&C insurer. In these circumstances, a gain could subsequently
arise to the extent there is residual value after the liability is fully
settled. However, at the time of purchasing the annuity, no value should
be ascribed to the contingent gain in its note disclosure since the
annuity presumably would have been appropriately underwritten and priced.
Recognition of financial liability and annuity
Under a Type 2 structured settlement arrangement, the financial liability
balance should continue to be recognized on the statement of financial
position. The financial liability of the P&C insurer to the claimant
has not been extinguished legally or in substance since the annuity is
commutable or assignable or transferable. Furthermore, a legal release
from being the primary obligor is not necessarily obtained from the
claimant. There is no irrevocable direction, as exists in Type 1, given by
the P&C insurer to the annuity underwriter to make all payments
directly to the claimant.
The structured settlement is effectively a temporary arrangement with the
annuity underwriter to conduct administrative services on behalf of the P&C
Correspondingly, the P&C 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 since there is a
reversionary interest or continuing right to a benefit from the annuity.
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 claim liabilities of similar type.
The asset and liability balances should not be offset as per IFRSs 4 (par.
The treatment accorded to the annuity asset is similar to that of a
reinsurance recoverable. For the Minimum Asset and Deposit Adequacy Tests,
annuities purchased from licensed Canadian life insurers will be
considered as assets available for test purposes. However, in the case of
foreign P&C insurers, these assets will need to be vested to be
considered as assets available for test purposes.
Financial guarantees and contingent assets
Under a Type 1 structured settlement, the claimant's recourse to the P&C
insurer represents a guarantee of the annuity underwriter's obligation to
make payments to the claimant pursuant to the terms and conditions of the
structured settlement. Guaranteeing the obligation of another party
exposes the P&C insurer to credit risk.
In addition, a contingent asset may exist in the case of a Type 1
structured settlement that is commutable.
As a result, the P&C insurer will need to assess the IFRSs accounting
and disclosure requirements that may be applicable for such items.
Annuities recognized on statement of financial position as assets
In the case of Type 2 structured settlements, there should be disclosure
in the notes relating to the terms and conditions, credit risk and fair
value of the annuities that are recognized as financial assets on the
statement of financial position.