The Group issues long-term insurance contracts that contain a discretionary participation feature (‘DPF’). This feature entitles the contract holder to receive, as a supplement to guaranteed benefits, additional benefits: • that are likely to be a significant portion of the total contractual benefits; • whose amount or timing is contractually at the discretion of the insurer; and • that are contractually based on: A) the performance of a specified pool of contracts or a specified type of contract; B) realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or C) the profit or loss of the company, fund or other entity that issues the contract. The classification of contracts is performed at the inception of each contract. The classification of the contract at inception remains the classification of the contract for the remainder of its lifetime, unless the terms of the contract change to such an extent that it is treated as an extinguishment of the existing contract and the issuance of a new contract. Insurance contracts The Group issues long-term insurance contracts that transfer insurance risk and include a DPF component. Such contracts may also transfer financial risk. The DPF component in the Group’s insurance contracts cannot be determined and separated from the insurance component from inception. The respective cash flows relating to each component are also not independent of each other. Each year, any profits or losses arising on the non-DPF component are allocated to the DPF component. In this way a significant portion of the insurance risk is carried by the policyholder in the DPF component of their benefits. The profits or losses will include the impact of changes in the underlying assumptions or estimates on the non-DPF policy liabilities. The DPF component cannot therefore be unbundled or accounted for as a separate investment contract. In such cases, IFRS 4 accepts that the entire insurance contract is accounted for as a liability with movements through the Statement of Profit or Loss and other Comprehensive Income. Short-term insurance contracts provide benefits under short-term policies, which include motor, household and professional indemnity, or a combination of any of those policies. Short-term insurance contracts are further classified into the following categories: • Personal insurance, consisting of insurance provided to individuals and their personal property; and • Commercial insurance, providing cover on the assets and liabilities of business enterprises. 4.2 Valuation and recognition 4.2.1 Long-term Insurance contracts Principles of valuation and profit recognition The accounting policy for the measurement of liabilities in respect of insurance contracts has been determined having regard to the Standard of Actuarial Practice (SAPs) and Advisory Practice Notes (APNs) issued by the Actuarial Society of South Africa (ASSA). Of particular relevance to the insurance liability calculations, are the following actuarial guidance notes: SAP 104: Life Offices – Valuation of Long-Term Insurers APN 102: Life Offices – HIV/AIDS APN 105: Recommended AIDS extra mortality bases 4. Insurance and investment contracts (continued) 4.1 Classification of contracts (continued) 109 Group Accounting Policies
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