CVM Resolution 98 (Repealed): Approval of Consolidated Technical Pronouncement CPC 11 on Insurance Contracts

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes public that the Board, in a meeting held on April 14, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6,404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6,385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10,139, of November 28, 2019, APPROVED the following Resolution:

Art. 1. It is made mandatory for publicly-held companies the Technical Pronouncement CPC 11, which deals with insurance contracts, issued by the Accounting Pronouncements Committee – CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. Deliberation 563, of December 17, 2008, is revoked, from the effective date of this Resolution.

Art. 3. This Resolution enters into force on July 1, 2022.

Signed electronically by
Marcelo Barbosa
President

ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 11
INSURANCE CONTRACTS
Correlation to International Financial Reporting Standards – IFRS 4

Summary Item
OBJECTIVE 1
SCOPE 2 – 12
Embedded derivative 7 – 9
Separation of deposit components 10 - 12
RECOGNITION AND MEASUREMENT 13 – 35
Temporary exceptions to other pronouncements 13 – 20 Liability adequacy test 15 – 19 Impairment of reinsurance contract assets 20 Changes in accounting policies 21 – 25 Current market interest rates 24 Continuation of existing practices 25 Prudence 26 Future investment margin 27 – 29 Shadow accounting 30 Insurance contracts acquired in a business combination or portfolio transfer 31 – 33 Discretionary participation feature in insurance contracts 34 Discretionary participation feature in financial instruments 35 DISCLOSURE 36 – 39 Explanation of recognized amounts 36 – 37 Nature and extent of risks arising from insurance contracts 38 – 39A DATE OF INITIAL APPLICATION AND TRANSITION 40 – 45 Disclosure 42 – 44 New designation for financial assets 45
Appendix A – Definitions

Objective

The objective of this Pronouncement is to specify the accounting recognition for insurance contracts by any entity that issues such contracts (referred to in this Pronouncement as an insurer) until this Accounting Pronouncements Committee completes the second phase of the project on insurance contracts, in line with international accounting standards which provide, for this second phase, the deepening of relevant conceptual and practical issues. In particular, this Pronouncement determines:
(a) limited improvements in the accounting for insurance contracts by insurers; (b) disclosure that identifies and explains the amounts resulting from insurance contracts in the insurer’s financial statements and that helps users of those financial statements to understand the amount, timing and uncertainty of future cash flows arising from insurance contracts.

Scope
2. The entity shall apply this Pronouncement to:
(a) insurance contracts (including reinsurance contracts) issued by it and reinsurance contracts held by it; and (b) financial instruments that it issues with a discretionary participation feature (see item 35). The current accounting practice on Financial Instruments requires disclosure of financial instruments, among which must be included financial instruments that possess such characteristics.

This Pronouncement does not deal with other aspects of insurer accounting, such as the accounting for financial assets held by insurers and financial liabilities issued by insurers (see CPC 39 – Financial Instruments: Presentation, CPC 40 – Financial Instruments: Disclosure and CPC 48 – Financial Instruments), except:
(a) item 20A allows insurers that meet the specified criteria to apply a temporary exemption from CPC 48; (b) item 35B allows insurers to apply the overlay approach to designated financial assets; and (c) item 45 allows insurers to reclassify, in specified circumstances, some or all of their financial assets so that the assets are measured at fair value through profit or loss.
The entity shall not apply this Pronouncement to:
(a) product warranties issued directly by the manufacturer, merchant or retailer (see CPC 47 – Revenue from Contracts with Customers and CPC 25 – Provisions, Contingent Liabilities and Contingent Assets); (b) employer assets and liabilities relating to employee benefit plans and retirement benefit obligations reported as defined benefit retirement plans;

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 (c) contractual rights or obligations that depend on the use, or the right to use, of a non-financial item (for example, some license fees, royalties, variable lease payments and similar items), as well as embedded residual value guarantees in a lease (see CPC 06 – Leases, CPC 47 and CPC 04 – Intangible Assets); (d) contracts with financial guarantees, unless the issuer has previously and explicitly stated that it considers such contracts as insurance contracts and has used the accounting method applicable to insurance contracts, in which case the issuer may choose to adopt the accounting practice applicable to CPC 39, CPC 40 and CPC 48 or this Pronouncement to these types of contracts with financial guarantees. The issuer may make this option “contract by contract”, however, the option that it makes for each contract will be irrevocable; (e) contingent consideration to be paid or received in a business combination; (f) direct insurance contracts that the entity holds (i.e., direct insurance contract in which the entity is the insured). However, a cedent must apply this Pronouncement to reinsurance contracts held by it.

For reference, this Pronouncement considers any entity that issues an insurance contract as an insurer, regardless of whether the issuer is considered an insurer for legal or supervisory purposes. All references, in items 3(a) and (b), 20A to 20Q, 35B to 35N, 39B to 39M and 46 to 49, to insurer shall be read as also encompassing the issuer of a financial instrument containing a discretionary participation feature.
A reinsurance contract is a type of insurance contract. Thus, all references in this Pronouncement to insurance contracts also apply to reinsurance contracts.

Embedded derivative
7. CPC 48 requires the entity to separate some embedded derivatives from their host contract, measure them at fair value and include, in profit or loss, changes in their fair value. CPC 48 is applicable to embedded derivatives in an insurance contract, except if the embedded derivative is itself an insurance contract.

As an exception to the requirements of CPC 48, the insurer does not need to separate and measure at fair value the policyholder’s option to surrender the insurance contract for a fixed amount (or for an amount based on a fixed amount and an interest rate), even if the exercise price is different from the amount recognized in the liability for the main insurance contract. However, the requirements of CPC 48 must be applied for put options and cash surrender options embedded in the insurance contract, if the surrender value varies based on financial variables (such as stock or commodity prices or indices), or a non-financial variable that is not specific to one of the parties to the contract. Furthermore, this requirement must also be applied if the possibility of the holder exercising the put or cash surrender option is triggered by such variable (for example, a put option that can be exercised if the stock exchange index reaches a certain level).
What is presented in the previous item must also be applied to redemption options of a financial instrument that contains a discretionary participation feature.

Separation of deposit components

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000
10. Some insurance contracts contain both insurance components and deposit components. In some cases, the insurer is required or permitted to account for these components separately:
(a) separate accounting is required if both of the following conditions are met:
(i) the insurer can measure the deposit component (including any embedded redemption option) separately (i.e., without considering the insurance component); and (ii) the insurer’s accounting policy does not otherwise recognize all obligations and rights resulting from the deposit component; (b) separate accounting is permitted, but not required, if the insurer can measure the deposit component separately as in (a)(i), but its accounting policy requires it to recognize all obligations and rights arising from the deposit component, regardless of the basis used to measure such rights and obligations; (c) separate accounting is prohibited if the insurer cannot measure the deposit component separately as in (a)(i).

The following is an example where the insurer’s accounting policy does not require the recognition of all obligations resulting from the deposit component. A cedent receives indemnification from a reinsurer, but the contract obligates the cedent to reimburse the indemnification in future years. This obligation results from a deposit component. If the cedent’s accounting policy allows the recognition of the indemnification as revenue without recognizing the resulting obligation, separation is required.
To account for the contract separately, the insurer must:
(a) apply this Pronouncement to the insurance components; and (b) apply CPC 48 to the deposit components.

Recognition and measurement
Temporary exceptions to other pronouncements
13. The current accounting standard on “Accounting Policies, Changes in Accounting Estimates and Errors” specifies criteria to be used by the entity in the development of accounting policy if no current accounting practice applies specifically to that item. However, this Pronouncement exempts the insurer from applying such criteria to its accounting policies relating to:
(a) insurance contracts issued by it (including related selling expenses and related intangible assets, as described in items 31 and 32); and (b) reinsurance contracts that it holds.

Notwithstanding, this Pronouncement does not exempt the insurer from some implications of the criteria of the current accounting standard on “Accounting Policies, Changes in Accounting Estimates and Errors”. Specifically, the insurer:
(a) shall not recognize as a liability any provision for possible future claims, if those claims originate from insurance contracts that do not yet exist or are not in force on the date of the financial statement (such as catastrophe provisions or risk equalization provisions);

Liability adequacy test
15. The insurer must assess, at each balance sheet date, whether its liability for insurance contracts is adequate, using current estimates of future cash flows from its insurance contracts. If this assessment shows that the amount of the liability for insurance contracts (less related deferred selling expenses and related intangible assets, as discussed in items 31 and 32) is inadequate in light of the estimated future cash flows, the entire deficiency must be recognized in profit or loss.

If the insurer applies a liability adequacy test that meets the minimum requirements specified, this Pronouncement does not impose new requirements. The minimum requirements are:
(a) the test must consider current estimates for the entire contractual cash flow and related cash flows, such as claims settlement costs, as well as cash flows resulting from embedded options and guarantees; and (b) if the test shows that the liability is inadequate, the entire deficiency must be recognized in profit or loss.
If the insurer’s accounting policy does not require a liability adequacy test that meets the minimum requirements of item 16, that insurer must:
(a) determine the amount of the relevant liability for insurance contracts less the amount of:
(i) any related deferred selling expense; and
(ii) any related intangible asset, such as those acquired in a business combination or portfolio transfer (see items 31 and 32). However, reinsurance contract assets are not considered, because the insurer accounts for them separately (see item 20). (b) determine whether the amount described in (a) is less than the amount that would be required if the relevant liability for insurance contracts were recognized in accordance with the current accounting standard on “Provisions, Contingent Liabilities and Contingent Assets”. If it is less, the insurer must recognize the entire difference in profit or loss and reduce the amount of related deferred selling expenses or related intangible assets or increase the amount of the relevant liability for insurance contracts 1.

1 Liability for relevant insurance contract is the liability for insurance contract (and deferred acquisition costs and related intangible assets) where the insurer’s accounting policy does not require a liability adequacy test that meets the minimum requirements of item 16.

The amount described in item 17(b) must reflect future investment margins (see items 27-29) if, and only if, the amount described in item 17(a) also reflects such margins.

Impairment of reinsurance contract assets
20. If the cedent’s asset for a reinsurance contract has been impaired, the cedent must reduce the value of that asset and recognize the loss in profit or loss. An asset for a reinsurance contract is impaired if, and only if:
(a) there is objective evidence, as a result of an event that occurred after the initial recognition of the asset for the reinsurance contract, that the cedent may not receive the entire amount related to it under the contract; and (b) the impact of that event on the amount the cedent has to receive from the reinsurer can be measured reliably.

Temporary exemption from CPC 48
20A. CPC 48 deals with the accounting for financial instruments and is effective upon its approval by regulatory bodies. Regulators are advised that its effective date should be for annual periods beginning on or after January 1, 2018. However, for an insurer that meets the criteria of item 20B, this Pronouncement provides a temporary exemption that allows, but does not require, the insurer to apply CPC 38 – Financial Instruments: Recognition and Measurement instead of CPC 48, for annual periods beginning before January 1, 2021, unless another date is required or defined by regulatory bodies. The insurer that applies the temporary exemption from CPC 48 must:
(a) use the requirements of CPC 48 necessary to provide the disclosures required in items 39B to 39J of this Pronouncement; and (b) apply all other applicable Pronouncements to its financial instruments, except as described in items 20A to 20Q, 39B to 39J and 46 and 47 of this Pronouncement.

20B. The insurer may apply the temporary exemption from CPC 48 if, and only if:
(a) it has not previously applied any version of CPC 48, except the requirements for the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss in items 5.7.1(c), 5.7.7 to 5.7.9, 7.2.14 and B5.7.5 to B5.7.20 of CPC 48; and (b) its activities are predominantly insurance-related, as described in item 20D, on the date of its annual report immediately preceding April 1, 2016, or on a later date of submission of annual reports, as specified in item 20G.

20C. It is permitted for the insurer, which applies the temporary exemption from CPC 48, to decide to apply only the requirements for the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss in items 5.7.1(c), 5.7.7 to 5.7.9, 7.2.14 and B5.7.5 to B5.7.20 of CPC 48. If the insurer chooses to apply these requirements, it must apply the relevant transitional provisions of CPC 48, disclose that it has applied these requirements and provide the related disclosures continuously, as established in items 10 and 11 of CPC 40.

20D. The insurer’s activities are predominantly insurance-related if, and only if:
(a) the carrying amount of its liabilities arising from contracts within the scope of this Pronouncement, which includes all deposit components or embedded derivatives accounted for separately from insurance contracts by applying items 7 to 12 of this Pronouncement, is significant in comparison with the total book value of all its liabilities; and (b) the percentage of the total carrying amount of its insurance-related obligations (see item 20E) relative to the total carrying amount of all its liabilities is as follows:
(i) greater than 90%; or
(ii) less than or equal to 90%, but greater than 80%, and the insurer is not involved in significant non-insurance activity (see item 20F).

20E. For the purposes of applying item 20D(b), insurance-related liabilities comprise:
(a) liabilities arising from contracts within the scope of this Pronouncement, as described in item 20D(a); (b) non-derivative investment contracts measured at fair value through profit or loss, as applied by CPC 38 (including those designated as at fair value through profit or loss to which the insurer has applied the requirements of CPC 48 for the presentation of gains and losses (see items 20B(a) and 20C)); and (c) liabilities that arise because the insurer issues the contracts provided for in (a) and (b), or fulfills the obligations arising from these contracts. Examples of such liabilities include derivatives used to mitigate the risks arising from these contracts and the assets representing these contracts, relevant tax obligations, such as deferred tax liabilities for temporary differences on obligations arising from these contracts, and debt instruments issued, which are included in the insurer’s regulatory capital.

20F. In assessing whether it is involved in significant, non-insurance activity, for the purposes of applying item 20D(b)(ii), the insurer must consider:
(a) only activities in which it can obtain revenues and incur expenses; and (b) quantitative or qualitative factors (or both), including information available to the public, such as the industry classification for users of the applicable financial statements of the company.

20G. Item 20B(b) requires the entity to assess whether it is qualified, for the temporary exemption from CPC 48, on the date of its annual report immediately preceding April 1, 2016. After that date:
(a) the entity, which has already qualified for the temporary exemption from CPC 48, must reevaluate whether its activities are predominantly insurance-related in the following annual report, if, and only if, there has been a change in the entity’s activities, as described in items 20H and 20I, during the annual period ending on that date; (b) it is permitted for the entity, which previously did not qualify for the temporary exemption from CPC 48, to reevaluate whether its activities are predominantly insurance-related on the subsequent annual report date until December 31, 2018, if, and only if, there has been a change in the

Appendix B – Definition of insurance contracts

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 activities of the entity, as described in items 20H and 20I, during the annual period that ended on that date. 20H. For the purposes of applying item 20G, a change in the activities of the entity is a change that:
(a) is determined by the entity's management as a result of internal or external changes; (b) is significant to the entity's operations; and (c) is demonstrable to external parties.
Thus, such a change only occurs when the entity begins or ceases to carry out an activity that is significant to its operations or significantly alters the magnitude of one of its activities, for example, when the entity acquires, eliminates or closes a line of business. 20I. It is expected that the change in the activities of the entity, as described in item 20H, will be very infrequent. The following examples do not constitute changes in the activities of the entity for purposes of applying item 20G:
(a) the change in the entity's financing structure that, in itself, does not affect the activities from which the entity obtains revenues and incurs expenses; (b) the entity's plan to sell a line of business, even if the assets and liabilities are classified as held for sale in accordance with CPC 31 – Non-Current Asset Held for Sale and Discontinued Operation. The plan to sell the line of business may change the activities of the entity and give rise to a reassessment of qualification in the future, but still has to affect the liabilities recognized in its balance sheet. 20J. If the entity does not qualify for the temporary exemption from CPC 48, as a result of the reassessment of qualification (see item 20G(a)), then it is authorized to continue to apply the temporary exemption from CPC 48 only until the end of the annual period that began immediately after the reassessment of qualification. However, the entity must apply CPC 48 for annual periods beginning on or after January 1, 2021. For example, if the entity determines that it no longer qualifies for the temporary exemption from CPC 48 to apply item 20G(a) on December 31 of 2018 (end of its annual period), then the entity is authorized to continue to apply the temporary exemption from CPC 48 only until December 31, 2019. 20K. The insurer, which previously opted to apply the temporary exemption from CPC 48, may at the beginning of any subsequent annual period and irrevocably, decide to apply CPC 48. First-time adopter 20L. The first-time adopting entity, as defined in CPC 37 – Initial Adoption of International Accounting Standards, may apply the temporary exemption from CPC 48 described in item 20A, if, and only if, it meets the criteria described in item 20B. When applying item 20B(b), the first-time adopter must use the accounting values determined for the application of International Accounting Standards on the date specified in that item. 20M. CPC 37 contains requirements and exemptions applicable to the first-time adopter. These requirements and exemptions (for example, items D16 and D17 of CPC 37) do not replace the requirements of items 20A to 20Q and 39B to 39J of this pronouncement. For example, the requirements and exemptions in CPC 37 do not replace the requirement that the first-time adopter must meet the criteria specified in item 20L to apply the temporary exemption from CPC 48.

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 20N. The first-time adopter, which discloses the information required by items 39B to 39J, must use the requirements and exemptions in CPC 37 that are relevant to make the changes required for these disclosures. Temporary exemption from specific requirements of CPC 18 20O. Items 35 and 36 of CPC 18 – Investment in Associate, in Controlled Entity and in Jointly Controlled Entity require that the entity apply uniform accounting policies when using the equity method. However, for annual periods beginning before January 1, 2021, it is permitted to the entity, but not required, to maintain the relevant accounting policies applied by the associate or jointly controlled entity in the following way:
(a) the entity applies CPC 48, but the associate or jointly controlled entity applies the temporary exemption from CPC 48; or (b) the entity applies the temporary exemption from CPC 48, but the associate or jointly controlled entity applies CPC 48. 20P. When the entity uses the equity method to account for its investment in an associate or jointly controlled entity:
(a) if CPC 48 was previously applied in the financial statements used to apply the equity method to that associate or jointly controlled entity (after reflecting any adjustments made by the entity), then CPC 48 must continue to be applied; (b) if the temporary exemption from CPC 48 was previously applied in the financial statements used to apply the equity method to that associate or jointly controlled entity (after reflecting any adjustments made by the entity), then CPC 48 may be applied subsequently. 20Q. The entity may apply items 20O and 20P(b) separately for each associate or jointly controlled entity. Changes in the basis for determining contractual cash flows as a result of the benchmark interest rate reform 20R. An insurer that applies the temporary exemption from CPC 48 must apply the requirements in items
5.4.6 to 5.4.9 of CPC 48 to a financial asset or financial liability if, and only if, the basis for
determining the contractual cash flow of that financial asset or financial liability changes as a result of the benchmark interest rate reform. For this purpose, the term “benchmark interest rate reform” refers to the reform in the entire market of a benchmark interest rate as described in item 102B of CPC 38. 20S. For the purposes of applying items 5.4.6 to 5.4.9 of the amendments to CPC 48, the references to item B5.4.5 of CPC 48 must be read as references to item AG7 of CPC 38. References to items
5.4.3 and B5.4.6 of CPC 48 must be read as referring to item AG8 of CPC 38.
Changes in accounting policies

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000
21. Items 22-30 are applied both to changes made by an insurer that already adopts the accounting
practices provided for in this Pronouncement and to changes made by an insurer that is adopting this Pronouncement for the first time.
22. The insurer may change its accounting policy for insurance contracts if, and only if, the
changes make the financial statements more relevant to the needs of users who make economic decisions and not less reliable, or more reliable and not less relevant to such needs. The insurer must judge relevance and reliability according to the criteria of the current accounting standard on “Accounting Policies, Changes in Accounting Estimates and Correction of Errors”.
23. To justify changes in its accounting policy for insurance contracts, the insurer must
demonstrate that the change made the financial statements more consistent with the criteria of the current accounting standard on “Accounting Policies, Changes in Accounting Estimates and Correction of Errors”, but the change does not need to achieve full compliance with such criteria. The following problems are discussed below:
(a) current market interest rates (item 24);
(b) continuation of existing practices (item 25); (c) prudence (item 26); (d) future investment margins (items 27-29); and (e) shadow accounting (item 30).
Current market interest rates
24. It is permitted to the insurer, but not required, to change its accounting policy in order to reassess liabilities
for designated insurance contracts 2 to reflect current market interest rates and recognize the changes of this liability in the result. At the same time, the insurer may also introduce accounting policy that requires other current estimates and assumptions for such liability. The option provided by this item allows the insurer to change its accounting policy for the designated liabilities, without applying such policy consistently to all similar liabilities, as the current accounting standard on “Accounting Policies, Changes in Accounting Estimates and Correction of Errors” would otherwise require. If the insurer designates liabilities to adopt this procedure, it must continue to apply current market interest rate (and, if applicable, other current estimates and assumptions) consistently in all periods and for all designated liabilities until they are extinguished. Continuation of existing practices
25. The insurer may continue to adopt the following practices, but the introduction of any of them
does not satisfy item 22:
(a) measure liabilities for insurance contracts on a non-discounted basis; (b) measure contractual rights related to future investment management commissions at a value that exceeds its fair value obtained from comparison with current rates charged by other market participants for similar services. It is likely that the fair value at the beginning

2 In this item, liabilities for insurance contracts include related deferred sales expenses and related intangible assets, as discussed in items 31 and 32.

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 of such contracts will be equal to the original cost paid, unless the future investment management commission and related costs are not compatible with the market; and (c) use accounting policy for insurance contracts (and related deferred sales expenses and related intangible assets, if any) that are not uniform for subsidiaries, with the exception permitted by item 24. If the accounting policies are not uniform, the insurer may change them if the change does not make the accounting policies more diverse and also satisfies other requirements of this Pronouncement. Prudence
26. The insurer does not need to change its accounting policy for insurance contracts to eliminate
excess prudence. However, if the insurer already measures its insurance contracts with sufficient prudence, it should not introduce additional prudence.
Future investment margin
27. The insurer does not need to change its accounting policy for insurance contracts to eliminate
future investment margins. However, there is a rebuttable presumption that the insurer's financial statements will become less relevant and reliable if it introduces an accounting policy that reflects future investment margins in the measurement of insurance contracts, unless such margins affect contractual payments. Two examples of accounting policies that reflect such margins are:
(a) using a discount rate that reflects the estimated return of the insurer's assets; or (b) projecting the returns of these assets at an estimated return rate, discounting these projected returns at a different rate and including the result in the measurement of the liability.
28. The insurer may overcome the rebuttable presumption described in item 27 if, and only if, the other
components of the change in accounting policy increase the relevance and reliability of its financial statements sufficiently to compensate for the decrease in relevance and reliability caused by the inclusion of future investment margins. For example, suppose that the insurer's accounting policy for insurance contracts involves excessively prudent assumptions defined at the beginning and a discount rate prescribed by the regulator without direct reference to market conditions, and does not consider some embedded options and guarantees. The insurer may make its financial statements more relevant and not less reliable, changing to an investor-oriented accounting that is widely used and involves:
(a) current estimates and assumptions;
(b) reasonable (but not excessively prudent) adjustments to reflect risks and uncertainties; (c) measurements that reflect both the intrinsic value and the time value of embedded options and guarantees; and (d) current market discount rate, even if this discount rate reflects the estimated returns of the insurer's assets.
29. In some measurement approaches, the discount rate is used to determine the present value of the future profit margin. This profit margin is allocated to different periods by
means of a formula. In these approaches, the discount rate only affects the measurement of the liability indirectly. In particular, the use of a less appropriate discount rate produces

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 limited effects or no effects on the initial measurement of the liability. However, in other approaches, the discount rate determines the measurement of the liability directly. In the latter case, since the introduction of an asset-based discount rate has a more significant effect, it is very unlikely that the insurer can overcome the rebuttable presumption described in item 27. Shadow accounting
30. In some accounting models, realized gains or losses on the insurer's assets have a direct
effect on the measurement of some or all of (a) its insurance contract liabilities; (b) related deferred sales expenses; and (c) related intangible assets, as described in items 31 and 32. It is permitted to the insurer, but not required, to change its accounting policy, so that gains or losses recognized, but not realized from an asset, affect these measurements in the same way as realized gains or losses. The adjustment to the insurance contract liability (or to the deferred sales expense or intangible asset) must be recognized in equity if, and only if, the unrealized gains and losses are recognized directly in equity. This practice is sometimes described as shadow accounting. Insurance contracts acquired in a business combination or portfolio transfer
31. The insurer must, on the acquisition date, and as soon as the technical pronouncement on
business combinations to be issued by this Committee of Accounting Pronouncements in consonance with international accounting standards is in effect, measure at fair value the liabilities for insurance contracts assumed and the assets for insurance contracts acquired in a business combination. However, it is permitted to the insurer, but not required, to use an expanded presentation that divides the fair value of the acquired insurance contracts into two components:
(a) liability measured according to the accounting policies for insurance contracts issued by the insurer; and (b) intangible asset, representing the difference between (i) the fair value of the rights for insurance contracts acquired and insurance contract obligations assumed and (ii) the amount described in (a). The subsequent measurement of this asset must be consistent with the measurement of the related insurance contract liability.
32. The insurer, when acquiring a portfolio of insurance contracts, may use the expanded presentation
described in item 31.
33. The intangible assets described in items 31 and 32 are excluded from the scope of Technical Pronouncement CPC 01 – Impairment of Assets and Technical Pronouncement CPC 04
– Intangible Asset. However, these pronouncements are applied to customer portfolios and customer relationships that reflect the expectation of future contracts that are not part of the rights for insurance contracts and obligations for insurance contracts already existing on the date of the business combination or portfolio transfer. Discretionary participation feature in insurance contracts
34. Some insurance contracts contain a discretionary participation feature and also a guaranteed element. The issuer of this contract:

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 (a) may, but is not obliged, recognize the guaranteed element separately from the discretionary participation feature. If the issuer does not recognize them separately, it must classify the entire contract as a liability. If the issuer classifies them separately, it must classify the guaranteed element as a liability; (b) must, if recognizing the discretionary participation feature separately from the guaranteed element, classify this feature either as a liability or as a separate component of equity. This Pronouncement does not specify how the issuer determines whether the feature is a liability or part of equity. The issuer may divide the feature into liability and equity components and must use consistent accounting policy for this division. The issuer must not classify this feature as an intermediate category that is neither a liability nor equity; (c) may recognize the entire premium received as revenue without separating any portion for equity. The resulting changes in the guaranteed element and in the discretionary participation feature classified as a liability must be recognized in the result. If part or all of the discretionary participation feature is classified in equity, a portion of the result may be attributed to that feature (as well as a part may be attributed to minorities). The issuer must recognize the portion of the result attributed to any equity component with a discretionary participation feature as a distribution of result, not as an expense or revenue; (d) must, if the contract contains an embedded derivative within the scope of CPC 48, apply the provisions of CPC 48 for that embedded derivative; and (e) must, for all aspects not described in items 14 to 20 and 34 (a) to (d), continue with its accounting policies for such contracts, unless the insurer changes its accounting policies to comply with items 21 to 30. Discretionary participation feature in financial instruments
35. The requirements of item 34 also apply to financial instruments with a discretionary participation feature. In addition:
(a) if the issuer classifies the entire discretionary participation feature as a liability, it must apply the liability adequacy test of items 15 to 19 to the entire contract (that is, both for the guaranteed element and for the discretionary participation feature). The issuer does not need to determine the amount that would result from the application of CPC 48 for the guaranteed element; (b) if the issuer classifies part or all of this feature as a separate component of equity, the liability recognized for the entire contract must not be less than the value that would result from the application of CPC 48 for the guaranteed elements. This amount must include the intrinsic value of the contract's redemption option, but does not need to include the time factor, if item 9 exempts this option from fair value measurement. The issuer does not need to disclose the amount that would result from the application of CPC 48 for the guaranteed element, nor needs to present its amount separately. Furthermore, the issuer does not need to determine this value if the total recognized liability is clearly higher; (c) although these contracts are financial instruments, the issuer may continue to recognize the premiums of these contracts as revenue and recognize as expense the value of the increase in the liability; (d) although these contracts are financial instruments, the issuer that applies the disclosure standards on financial instruments for contracts with discretionary participation must

SECURITIES AND EXCHANGES COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 disclose the total interest expense recognized in profit or loss, but does not need to calculate such interest expense using the effective interest method.

35A. The temporary exemptions in items 20A, 20L and 20O and the overlap approach in item 35B are also available for the issuer of a financial instrument that contains a discretionary participation feature. Therefore, all references, in items 3(a) and (b), 20A to 20Q, 35B to 35N, 39B to 39M and 46 to 49, to the insurer, must be read as also encompassing the issuer of a financial instrument that contains a discretionary participation feature.

Presentation
Overlap Approach

35B. An insurer is permitted, but not required, to apply the overlap approach to designated financial assets. An insurer that applies the overlap approach must:
(a) reclassify from profit or loss to other comprehensive income the amount of the result obtained at the end of the period of the financial statements for the designated financial assets, which would be the same as if the insurer had applied CPC 38 to the designated financial assets. Therefore, the reclassified amount is equal to the difference between:
(i) the amount reported in profit or loss for the designated financial assets, applying CPC 48; and (ii) the amount that would have been reported in profit or loss for the designated financial assets, if the insurer had applied CPC 38; (b) apply all other applicable pronouncements to its financial instruments, except as described in items 35B to 35N, 39K to 39M, 48 and 49 of this pronouncement.

35C. An insurer may opt to apply the overlap approach described in item 35B only when applying CPC 48 for the first time, including when applying CPC 48 for the first time after having previously applied it, with respect to:
(a) the temporary exemption from CPC 48 described in item 20A; or (b) only the requirements for the presentation of the result on financial liabilities, designated as at fair value through profit or loss in items 5.7.1(c), 5.7.7 to 5.7.9, 7.2.14 and B5.7.5 to B5.7.20 of CPC 48.

35D. The insurer must present the amount, reclassified from profit or loss to other comprehensive income, resulting from the application of the overlap approach:
(a) in profit or loss as a separate item; and
(b) in other comprehensive income as a separate component of other comprehensive income.

35E. A financial asset is eligible for designation under the overlap approach if, and only if, the following criteria are met:
(a) it is measured at fair value through profit or loss by applying CPC 48, but would not have been measured at fair value through profit or loss, in its entirety, by applying CPC 38; and (b) it is not held in relation to an activity that is outside the scope of this pronouncement. Examples of financial assets that would not be eligible for the overlap approach are those assets held within the domain of banking activities or financial assets held in funds related to investment contracts, which are outside the scope of this pronouncement.

35F. The insurer may designate a financial asset as eligible for the overlap approach when it opts to apply the overlap approach (see item 35C). Subsequently, it may designate a financial asset as eligible for the overlap approach when, and only when:
(a) this asset is initially recognized; or
(b) this asset has recently come to meet the criterion in item 35E(b) and did not meet this criterion previously.

35G. The insurer is permitted to apply item 35F on an instrument-by-instrument basis to designate financial assets as eligible for the overlap approach.

35H. When relevant, for the purposes of applying the overlap approach to a newly designated financial asset, in the application of item 35F(b):
(a) its fair value at the date of designation must be its new carrying amount of amortized cost; and (b) the effective interest rate must be determined based on its fair value at the date of designation.

35I. The entity must continue to apply the overlap approach to a designated financial asset until that financial asset is derecognized. However, the entity:
(a) must remove the designation of the financial asset when it ceases to satisfy the criterion described in item 35E(b). For example, the financial asset ceases to meet this criterion when the entity transfers this asset to be held within its banking activities or when the entity ceases to be an insurer; (b) may, at the beginning of any annual period, stop applying the overlap approach for all designated financial assets. An entity that opts to cease applying the overlap approach must apply CPC 23 to account for the change in accounting policy.

35J. When the entity removes the designation of the financial asset, applying item 35I(a), it must reclassify it from accumulated other comprehensive income to profit or loss as a reclassification adjustment (see CPC 26) of any balance relating to that financial asset.

35K. If the entity stops using the overlap approach, applying the option provided in item 35I(b) or because it is no longer an insurer, it must not subsequently apply the overlap approach. An insurer that opted to apply the overlap approach (see item 35C), but does not have eligible financial assets (see item 35E), may subsequently apply the overlap approach when it possesses eligible financial assets.

Interaction with other requirements

35L. Item 30 of this pronouncement allows the practice that is sometimes described as shadow accounting. If the insurer applies the overlap approach, the shadow accounting practice may be applicable.

35M. The reclassification of value from profit or loss to other comprehensive income, applying item 35B, may have a consequential effect of including other values in other comprehensive income, such as taxes. The insurer must apply relevant pronouncements, such as CPC 32 – Taxes on Income, to determine any consequential effect.

First-time Adopter

35N. If a first-time adopting entity opts to apply the overlap approach, it must restate comparative information to reflect the overlap approach if, and only if, it restates comparative information to comply with CPC 48.

Disclosure
Explanation of Recognized Values

The insurer must disclose information that identifies and explains the values in its financial statements resulting from insurance contracts.
To be adequate to item 36, the insurer must disclose:
(a) its accounting policies for insurance contracts and related assets, liabilities, revenues and expenses; (b) the assets, liabilities, revenues and expenses recognized (and cash flow, if the insurer presents the cash flow statement by the direct method) resulting from insurance contracts. Furthermore, if the insurer is a cedent, it must disclose:
(i) gains and losses recognized in profit or loss on the contracting of reinsurance; and (ii) if the cedent defers and amortizes gains and losses resulting from the contracting of reinsurance, the amortization for the period and the amount not yet amortized at the beginning and end of the period. (c) the process used to determine the assumptions that have the greatest effect on the measurement of recognized values described in (b). Whenever possible, the insurer must also disclose quantitative aspects of such assumptions; (d) the effect of changes in the assumptions used to measure assets and liabilities by insurance contract, showing separately the effect of each change that has a material effect on the financial statements; (e) the reconciliation of changes in insurance contract liabilities, reinsurance contract assets and, if any, deferred marketing expenses related.

Nature and Extent of Risks Arising from Insurance Contracts

The insurer must disclose information that assists users in understanding the nature and extent of risks arising from insurance contracts.
To be adequate to item 38, the insurer must disclose:
(a) its existing objectives, policies and processes for managing risks resulting from insurance contracts and the methods and criteria used to manage these risks; (b) (eliminated); (c) information on insurance risks (before and after risk mitigation by reinsurance), including information on:
(i) sensitivity to insurance risk (see item 39A); (ii) concentration of insurance risks, including a description of how management determines concentrations, as well as a description of the common characteristics that identify each concentration (for example, type of insured event, geographic area or currency); (iii) incurred claims compared with previous estimates (i.e., claims development). Disclosure on claims development must go back to the period of the oldest material claim for which there is still uncertainty about the amount and timeliness of the indemnity payment, but does not need to go back more than ten years. The insurer does not need to disclose this information for claims whose uncertainty about the amount and timeliness of the indemnity is typically resolved within a one-year period. (d) information on credit risk, liquidity risk and market risk that items 31 to 42 of Technical Pronouncement CPC 40 require when the insurance contract is within the scope of Technical Pronouncement CPC 40. However:
(i) the insurer does not need to present the maturity analysis required by items 39(a) and (b) of Technical Pronouncement CPC 40 if it discloses information on the estimated timeliness of net cash flows resulting from recognized insurance liabilities. This disclosure may take the form of an analysis, by estimated timeliness, of the amounts recognized in the balance sheet; (ii) if the insurer uses an alternative method of managing sensitivity to market conditions, such as embedded value analysis, it may use this sensitivity analysis to fulfill the requirement provided in item 40(a) of Technical Pronouncement CPC 40. This insurer must also present the disclosures required in item 41 of Technical Pronouncement CPC 40; (e) information on exposure to market risk of embedded derivatives in a main insurance contract if the insurer is not required to measure, and does not measure, embedded derivatives at fair value.

39A. To comply with item 39(c)(i), the insurer must disclose the following in items (a) and (b):
(a) a sensitivity analysis showing how profit or loss and equity would have been affected had reasonably possible changes in the relevant risk variable occurred at the balance sheet date; the methods and assumptions used in preparing the sensitivity analysis; and any changes in the methods and assumptions used relative to the previous period. However, if the insurer uses an alternative method of managing sensitivity to market conditions, such as embedded value analysis, this insurer may fulfill this requirement by providing this alternative sensitivity analysis, as well as disclosures on sensitivity analysis prepared by it, such as value-at-risk, which reflects the interdependence between risks (i.e., interest rates and exchange rate fluctuations) and its use for managing financial risks. The entity must also disclose (a) an explanation of the method used in preparing such sensitivity analyses and the main parameters and assumptions and their sources; and (b) an explanation of the purpose of the method used and its limitations in determining the fair value of the assets and liabilities involved; (b) qualitative information about sensitivity and information regarding the terms and conditions of insurance contracts that have a material effect on the amount, timeliness and uncertainty of the insurer's future cash flows.

Disclosure on Temporary Exemption from CPC 48

39B. The insurer, which opts to apply the temporary exemption from CPC 48, must disclose information that allows users of the financial statements:
(a) understand how the insurer qualified for the temporary exemption; and (b) compare insurers, which apply the temporary exemption, with entities that apply CPC 48.

39C. To comply with item 39B(a), the insurer must disclose that it is applying the temporary exemption from CPC 48 and also how it concluded, at the date specified in item 20B(b), that it qualifies for the temporary exemption from CPC 48, including:
(a) if the carrying amount of its liabilities arising from contracts within the scope of this pronouncement (i.e., the liabilities described in item 20E(a)) was less than or equal to 90% of the total carrying amount of all its liabilities, the nature and carrying amount of obligations related to insurance that are not liabilities arising from contracts within the scope of this pronouncement (i.e., those liabilities described in items 20E(b) and 20E(c)); (b) if the percentage of the total carrying amount of its insurance-related obligations relative to the total carrying amount of all its liabilities was less than or equal to 90%, but greater than 80%, how the insurer determined that it is not involved in significant non-insurance activity, including the information it considered; and (c) if the insurer classified for the temporary exemption from CPC 48 based on a re-evaluation of qualification, applying item 20G(b):
(i) the reason for the re-evaluation of qualification; (ii) the date on which the relevant change in its activities occurred; and (iii) a detailed explanation of the change in its activities and the qualitative description of the effect of this change on the insurer's financial statements.

39D. If, when applying item 20G(a), the entity concludes that its activities are no longer predominantly insurance-related, it must disclose the following information in each period of the financial statements, before starting to apply CPC 48:
(a) the fact that the entity no longer qualifies for the temporary exemption from CPC 48; (b) the date on which the relevant change in its activities occurred; and (c) a detailed explanation of the change in its activities and the qualitative description of the effect of this change on the entity's financial statements.

39E. To comply with item 39B(b), the insurer must disclose the fair value at the end of the period of the financial statements and the amount of the change in fair value during this period for the following two groups of financial assets, separately:
(a) financial assets with contractual terms that give rise, on specified dates, to cash flows that consist exclusively of principal and interest payments on the outstanding principal amount (i.e., financial assets that meet the condition described in items 4.1.2(b) and 4.1.2A(b) of CPC 48), except any financial asset that satisfies the definition of held for trading of CPC 48, or that is managed and whose performance is evaluated based on fair value (see item B4.1.6 of CPC 48); (b) all other financial assets that are not specified in item 39E(a), i.e., any financial asset:
(i) with contractual terms that do not give rise, on specified dates, to cash flows that consist exclusively of principal and interest payments on the outstanding principal amount; (ii) that satisfies the definition of held for trading of CPC 48; or (iii) that is managed and whose performance is evaluated based on fair value.

39F. When disclosing the information described in item 39E, the insurer:
(a) may judge that the carrying amount of the financial asset measured, as applied by CPC 38, is a reasonable approximation of its fair value, if the insurer is not required to disclose the fair value, applying item 29(a) of CPC 40 (for example, short-term accounts receivable); and (b) must consider the level of detail necessary to allow users of the financial statements to understand the characteristics of the financial assets.

39G. To comply with item 39B(b), the insurer must disclose information on exposure to credit risk, including significant concentrations of credit risk, inherent in the financial assets described in item 39E(a). At a minimum, the insurer must disclose the following information for these financial assets at the end of the period of the financial statements:
(a) by credit risk rating classification, as defined in CPC 40, the carrying amounts applicable by CPC 38 (in the case of financial assets measured at amortized cost, before any adjustments for impairment losses); (b) for the financial assets described in item 39E(a) that, at the end of the period of the financial statements, do not have low credit risk, fair value and carrying amount, applying CPC 38 (in the case of financial assets measured at amortized cost, before any adjustments for impairment losses). For the purposes of this disclosure, item B5.5.22 of CPC 48 provides the relevant requirements for assessing whether the credit risk of the financial instrument is considered low.

39H. To comply with item 39B(b), the insurer must disclose the location where the user of the financial statements can obtain any publicly available information, required by CPC 48, that concerns the entity that is part of the group and that are not provided in the consolidated financial statements of this group for the period. For example, this information required by CPC 48 can be obtained in the individual or separate financial statements publicly available of the entity within the group that applied CPC 48.

39I. If the entity opted to apply the exemption provided in item 20O for the specific requirements described in CPC 18, it must disclose this fact.

39J. If the entity applied the temporary exemption from CPC 48 to account for its investment in an associate or jointly controlled entity, using the equity method (for example, see item 20O(a)), the entity must disclose the following, in addition to the information required by CPC 45 – Disclosure of Interests in Other Entities:
(a) the information described in items 39B to 39H for each associate or jointly controlled entity that is relevant to the entity. The values disclosed must be those included in the financial statements, prepared in accordance with the pronouncements, interpretations and guidelines of CPC, of the associate or jointly controlled entity after reflecting any adjustments made by the entity when using the

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 method of equity accounting (see item B14(a) of CPC 45), instead of the entity's share of these amounts; (b) the quantitative information described in items 39B to 39H, in aggregate, for all associates or jointly controlled entities that are individually immaterial. The aggregated amounts:
(i) disclosed must reflect the entity's share of these amounts; and (ii) for associates must be disclosed separately from the aggregated amounts disclosed for jointly controlled entities.
Disclosure about the overlay approach
39K. An insurer that applies the overlay approach must disclose information that enables users of the financial statements to understand:
(a) how the total amount reclassified from profit or loss to other comprehensive income in the period of the financial statements was calculated; and (b) the effect of this reclassification on the financial statements.
39L. To comply with item 39K, an insurer must disclose:
(a) the fact that it is applying the overlay approach; (b) the carrying amount at the end of the financial reporting period, by class, of the financial assets to which the insurer applies the overlay approach; (c) the rationale for designating the financial assets to which the overlay approach was applied, including an explanation of any designated financial assets that are held outside the legal entity that issues contracts within the scope of this Pronouncement; (d) an explanation of the total amount reclassified from profit or loss to other comprehensive income in the financial reporting period, in a manner that enables users of the financial statements to understand how this value was calculated, including:
(i) the amount presented in profit or loss for the designated financial assets that apply CPC 48; and (ii) the amount that would have been presented in profit or loss for the designated financial assets if the insurer had applied CPC 38; (e) the effect of the reclassification, described in items 35B and 35M, on each item of profit or loss affected; and (f) whether, during the financial reporting period, the insurer changed the designation of financial assets:
(i) the amount reclassified from profit or loss to other comprehensive income in the period relating to the newly designated financial assets for application of the overlay approach (see item 35F(b)); (ii) the amount that would have been reclassified from profit or loss to other comprehensive income in the period under review if the financial assets had not had the designation withdrawn (see item 35I(a)); and (iii) the amount reclassified in the period from accumulated other comprehensive income to profit or loss, relating to the financial assets whose designation was withdrawn (see item 35J). 39M. If the entity applied the overlay approach in accounting for its investment in an associate or jointly controlled entity, using the equity method, the entity must disclose the following, in addition to the information required by CPC 45:

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 (a) the information described in items 39K and 39L for each associate or jointly controlled entity that is material to the entity. The amounts disclosed are those included in the financial statements, prepared in accordance with the Pronouncements, interpretations and guidance of CPC, of the associate or jointly controlled entity, after reflecting any adjustments made by the entity when using the equity method (see item B14(a) of CPC 45), instead of the entity's share of these amounts; (b) the quantitative information described in items 39K and 39L(d) and (f), and the effect of the reclassification described in item 35B on the statement of profit or loss and other comprehensive income in aggregate for all associates or jointly controlled entities that are individually immaterial. The aggregated amounts:
(i) disclosed must reflect the entity's share of these amounts; and (ii) for associates, must be disclosed separately from the aggregated amounts disclosed for jointly controlled entities.
Effective date and transition
40. The transitional provisions of items 41 to 45 apply both to entities that already adopt the accounting practices provided for in this Pronouncement when they begin to apply this Pronouncement, and to entities that are applying the accounting practices provided for in this Pronouncement for the first time.
41. The entity must apply this Pronouncement for annual periods beginning in 2010. Early application is encouraged. If the entity applies international accounting standards for prior periods, it must disclose this fact.
41A to 41E. (Eliminated)
Disclosure
42. The entity does not need to apply the disclosure requirements of this Pronouncement for comparative information of annual periods prior to the initial adoption of this Pronouncement. For example, if the first year of adoption is 2010, the comparative disclosure requirement introduced by this Pronouncement is limited to 2009.
43. If it is impracticable to apply a particular requirement contained in items 10-35 for comparative information related to annual periods prior to the initial adoption of this Pronouncement, the entity must disclose the fact. Applying the liability adequacy test (items 15-19) for such comparisons may, at times, be impracticable, but it is very unlikely to be impracticable to apply the other requirements of items 10-35 for comparative information. The accounting standard in force on “Accounting Policies, Changes in Accounting Estimates and Errors” explains the term impracticable.
44. When applying item 39(b)(iii), the entity does not need to disclose information about claim development that occurred more than five years before the end of the first financial year in which this Pronouncement is applied. Furthermore, if it is impracticable when the entity first adopts this Pronouncement – to prepare information about claim development that

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 occurred before the beginning of the oldest period for which the entity presents complete comparative information that complies with this Pronouncement, the entity must disclose this fact. New designation for financial assets
45. Notwithstanding item 4.4.1 of CPC 48, when an insurer changes its accounting policies for insurance contract liabilities, it is permitted, but not required, to reclassify some or all of its financial assets so that they are measured at fair value through profit or loss. This reclassification is permitted if the insurer changes its accounting policies the first time it adopts this Pronouncement and if it subsequently makes a change in policy permitted in item 22. The reclassification is a change in accounting policy under CPC 23.
Application of this Pronouncement with CPC 48
Temporary exemption from CPC 48
46. The first revision of this Pronouncement, which allows insurers that meet the specified criteria to apply the temporary exemption from CPC 48, for annual periods beginning on or after January 1, 2018, amended items 3 and 5, and included items 20A to 20Q, 35A and 39B to 39J and their titles after items 20, 20K, 20N and 39A. The entity must apply these changes when the regulatory bodies approve CPC 48 and the mentioned revision, with regulators recommended to make it effective for annual periods beginning on or after January 1, 2018.
47. The entity, which discloses the information required by items 39B to 39J, must use the transitional provisions of CPC 48 that are relevant to make the changes required in these disclosures. The date of initial application for this purpose must be the beginning of the first annual period beginning on or after January 1, 2018.
Overlay approach
48. The first revision of this Pronouncement, which allows insurers to apply the overlay approach for designated financial assets, amended items 3 and 5 and included items 35A to 35N and 39K to 39M and their titles after items 35A, 35K, 35M and 39J. The entity must apply these changes, which allow insurers to apply the overlay approach for designated financial assets, when, after approval of the mentioned revision by regulators, it applies CPC 48 for the first time (see item 35C).
49. The entity that chooses to apply the overlay approach must:
(a) apply this approach retrospectively to the designated financial assets in the transition to CPC 48. Thus, for example, the entity must recognize, as an adjustment to the opening balance of accumulated other comprehensive income, the amount equal to the difference between the fair value of the designated financial assets determined by the application of CPC 48 and their carrying amount determined by the application of CPC 38; (b) restate comparative information to reflect the overlay approach if, and only if, the entity restates comparative information in the application of CPC 48.

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
APPENDIX A – DEFINITIONS
Cedant is the insured in a reinsurance contract.
Deposit component is the contractual component that is not accounted for as a derivative in accordance with CPC 48 and that would be within the scope of CPC 48 if it were a separate instrument.
Direct insurance contract is an insurance contract that is not a reinsurance contract.
Discretionary participation feature is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits:
(a) that are likely to be a significant part of the total contractual benefits; (b) whose value or timing depends contractually on a decision by the issuer; and (c) that are contractually based:
(i) on the performance of a specific set of contracts or a specific type of contract; (ii) on the investment returns, realized or unrealized, of a specific set of assets held by the issuer; or (iii) on the results of a company, fund or other entity that issues the contract. Fair value is the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Technical Pronouncement CPC 46). Financial Risk is the risk of possible future change in one or more interest rates, prices of financial instruments, commodity prices, exchange rates, price indices or rates, credit ratings or credit indices or another specified variable, provided that, in the case of a non-financial variable, this variable is not specific to one of the parties to the contract. Guaranteed benefits are payments or other benefits with respect to which a particular insured or investor has an unconditional right that is not subject to the contractual discretion of the issuer. Guaranteed element is the obligation to pay guaranteed benefits, included in a contract that contains a discretionary participation feature. Insurance contract asset is the insurer's net contractual right under an insurance contract. Insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the insured), agreeing to compensate the insured if a specific, future and uncertain event (insured event) adversely affects the insured. Insurance contract liability is the insurer's net contractual obligation under an insurance contract.

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
APPENDIX B – DEFINITION OF INSURANCE CONTRACTS
B1. This appendix provides guidance on the definition of insurance contract included in Appendix A. It addresses the following issues:
(a) the term “future and uncertain event” (items B2-B4); (b) payments in kind (items B5-B7); (c) distinction between insurance risk and other risks (items B8-B17); (d) examples of insurance contracts (items B18-B21); (e) significant insurance risk (items B22-B28); and (f) changes in the level of insurance risk (items B29 and B30). Future and uncertain event B2. Uncertainty (or risk) is the essence of an insurance contract. Thus, at least one of the following aspects is uncertain at the inception of an insurance contract:
(a) whether the insured event will occur;
(b) when it will occur; or
(c) the amount the insurer will have to pay if it occurs.
B3. In some insurance contracts, the insured event is the discovery of a loss during the term of the contract, even if the loss results from an event that occurred before the start of the contract. In other insurance contracts, the insured event is an event that occurs during the term of the contract, even if the resulting loss is discovered after the end of the contract period. B4. Some insurance contracts cover events that have already occurred, but whose financial effect is still uncertain. An example is a reinsurance contract that covers the direct insurer against adverse development of claims already reported by insureds. In these contracts, the insured event is the discovery of the final cost of these claims. Payment in kind B5. Some insurance contracts require or allow payments in goods or services. An example is when the insurer directly replaces a stolen item, instead of reimbursing the insured. Another example is when the insurer uses its own hospitals and medical staff to provide the medical services covered by the contracts. B6. Some service contracts that provide for fixed periodic payments, whose service levels depend on an uncertain event, satisfy the definition of insurance contract contained in this Pronouncement, but are not regulated as insurance contracts in some countries. An example would be a maintenance contract in which the service provider agrees to repair the specified equipment after a breakdown. The value of the fixed payment is based on the expected number of breakdowns, but whether a particular machine will break down is uncertain. The breakdown of the equipment adversely affects its owner and the contract compensates the owner (in goods or services instead of money). Another example is the contract for vehicle repair services, in which the provider agrees, for a fixed annual payment, to provide roadside assistance or tow the vehicle to a nearby garage. This last contract may satisfy the

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 definition of insurance contract even if the provider does not agree to make repairs or replace parts. B7. The application of this Pronouncement to the contracts described in item B6 should not be more onerous than the use of accounting practices that would be applicable if these contracts were outside the scope of this Pronouncement:
(a) it is unlikely that there will be significant liabilities for breakdowns or operational problems that have already occurred; (b) if CPC 47 is applied, the service provider must recognize revenue when (or as) it transfers services to the customer (subject to other criteria specified). This approach is also acceptable under this Pronouncement, which allows the service provider (i) to continue its existing accounting policies for these contracts, unless they involve practices not permitted by item 14 and (ii) to represent an improvement in its accounting policies, if such is permitted by items 22 to 30; (c) the service provider must consider whether the cost of satisfying its contractual obligation to provide the services exceeds the revenue received in advance. For this, the provider must apply the liability adequacy test described in items 15-19 of this Pronouncement. If this Pronouncement did not apply to these contracts, the service provider should apply the accounting practice in force on “Provisions, Contingent Liabilities and Contingent Assets” to determine if the contracts are onerous; (d) for these contracts, the disclosure requirements of this Pronouncement should not significantly add to the disclosures required by other accounting practices. Distinction between insurance risk and other risks B8. The definition of an insurance contract refers to an insurance risk, which this Pronouncement defines as risk, other than financial risk, transferred from the holder of a contract to the issuer. A contract that exposes the issuer to financial risk without significant insurance risk is not an insurance contract. B9. The definition of financial risk in Appendix A includes a list of financial and non-financial variables. This list includes non-financial variables that are not specific to a party to the contract, such as a loss index for earthquakes in a certain region or an index of temperatures in a certain city. The list excludes non-financial variables that are specific to a party to the contract, such as the occurrence, or not, of a fire that damages or destroys an asset of that party. Furthermore, the risk of changes in the fair value of a non-financial asset does not constitute a financial risk if the fair value reflects not only changes in the market prices of these assets (a financial variable), but also the condition of that specific non-financial asset held by a party to a contract (a non-financial variable). For example, if a guarantee of the residual value of a specific car exposes the guarantor to the risk of changes in the physical condition of the car, this risk constitutes an insurance risk, and not a financial risk. B10. Some contracts expose the issuer to financial risk, in addition to significant insurance risk. For example, many life insurance contracts guarantee a minimum rate of return to insureds (creating a financial risk) at the same time they promise death benefits, which, by

B11. Under some contracts, the occurrence of an insured event results in the payment of a value referenced to a price index. These contracts are insurance contracts, provided that the payment contingent on the insured event can be significant. For example, a life insurance annuity linked to a cost-of-living index transfers insurance risk, because the payment is triggered by an uncertain event – the survival of the annuitant. The link to the price index is an embedded derivative, but there is also a transfer of insurance risk. If the resulting transfer of insurance risk is significant, the embedded derivative meets the definition of an insurance contract. In this case, the embedded derivative does not need to be separated and measured at fair value (see paragraphs 7 to 9 of this Pronouncement).

B12. The definition of insurance risk refers to the risk that the insurer accepts from the policyholder. In other words, insurance risk is a preexisting risk, transferred from the policyholder to the insurer. Thus, a new risk created by the contract is not insurance risk.

B13. The definition of an insurance contract refers to an adverse effect on the policyholder. The definition does not limit the payment by the insurer to a value equal to the financial impact of the adverse event. For example, the definition does not exclude "new for old" coverage, which pays the policyholder enough to allow the replacement of an old and damaged asset with a new asset. Similarly, the definition does not limit the payment of a term life insurance contract to the financial loss suffered by the deceased's dependents, nor does it exclude the payment of predetermined amounts to quantify the loss caused by death or accident.

B14. Some contracts stipulate payment of indemnity if a specific uncertain event occurs, but do not require an adverse effect on the policyholder as a precondition for indemnity. Such a contract does not constitute an insurance contract, even if the holder uses the contract to mitigate an underlying risk exposure. For example, if a holder uses a derivative to hedge an underlying non-financial variable that is correlated with the cash flows of an entity's asset, the derivative does not constitute an insurance contract because the payment is not conditioned on the holder being adversely affected by a reduction in the cash flows resulting from the asset. Conversely, the definition of an insurance contract refers to an uncertain event, for which an adverse effect on the policyholder constitutes a contractual precondition for indemnity. This contractual precondition does not require the insurer to investigate whether the event actually caused an adverse effect, but allows the insurer to deny indemnity if it is not convinced that the event caused an adverse effect.

B15. Lapse risk or persistence risk (i.e., the risk that the counterparty cancels the contract earlier or later than the issuer expected when pricing the contract) does not constitute insurance risk, because the indemnity to the counterparty does not depend on an uncertain future event that adversely affects the counterparty. Similarly, expense risk (i.e., the risk of unexpected increases in administrative expenses associated with fulfilling the services of a contract, rather than expenses associated with insured events) does not constitute insurance risk because an unexpected increase in expenses does not adversely affect the counterparty.

B17. An insurer can only accept significant insurance risk from the policyholder if the insurer is an entity separate from the policyholder. In the case of mutual societies, such as taxi cooperatives, it accepts the risk of each policyholder and shares this risk. Although the policyholders bear this shared risk collectively in their capacity as owners, the mutual societies have accepted the risk, which is the essence of an insurance contract.

Examples of insurance contracts

B18. The following are examples of contracts that are insurance contracts, provided the transfer of insurance risk is significant:

(a) theft or property damage insurance;
(b) product liability, professional liability, civil liability, or legal expense insurance; (c) life insurance and pre-paid funeral plans (although death is certain, the timing of death is uncertain, or, for some types of insurance, whether death will occur during the period covered by the insurance); (d) life annuities and life-contingent pensions (i.e., contracts that provide compensation for the uncertain future event – the survival of the policyholder or pensioner – to help the policyholder or pensioner maintain a certain standard of living, which might otherwise be adversely affected by their survival); (e) disability and medical coverage; (f) sureties, fidelity performance bonds, performance bonds, and bid bonds (i.e., contracts that provide compensation if another party fails to fulfill a contractual obligation, for example, the obligation to construct a building); (g) credit insurance that provides specific indemnities to reimburse the holder for loss due to a specific debtor not making payment on the due date, in accordance with the initial or modified terms of the debt instrument. These contracts may take various legal forms, such as a financial guarantee, letter of credit, credit derivative contract covering default risk, or insurance contract. However, although these contracts meet the definition of an insurance contract, they also meet the definition of a financial guarantee contract under CPC 48 and are within the scope of CPC 39 (when the entity applies CPC 40, the reference to CPC 39 is replaced by the reference to CPC 40) and CPC 48, but not by this Pronouncement (see paragraph 4(d)). However, if the issuer of financial guarantee contracts has previously indicated expressly and explicitly that it considers these contracts as insurance contracts, and has accounted for them in accordance with the treatment reserved for such contracts, the issuer may decide to apply CPC 39 (when the entity applies CPC 40, the reference to CPC 39 is replaced by the reference to CPC 40) and CPC 48 or this Pronouncement to these financial guarantee contracts;

(i) title insurance (i.e., insurance against the discovery of problems in the title to a property that were not evident when the insurance contract was underwritten). In this case, the covered event is the discovery of a problem in the title, and not the problem itself;

(j) travel assistance (i.e., cash or goods or services compensation to policyholders for losses suffered while traveling). Paragraphs B6 and B7 discuss some contracts of this type;

(k) catastrophe bonds, which provide reduced payments of principal, interest, or both if a specified event adversely affects the issuer of the bond (unless the specified event does not create significant insurance risk, for example, if the event is a change in an interest rate or an exchange rate);

(l) insurance swaps and other contracts that require a payment based on changes in climatic, geological, or other physical variables that are specific to a party to the contract; and

(m) reinsurance contracts.

B19. The following are examples of items that are not insurance contracts:

(a) investment contracts that have the legal form of an insurance contract, but do not expose the insurer to significant insurance risk, for example, life insurance contracts in which the insurer does not retain any significant mortality risk (such contracts are non-insurance financial instruments or service contracts; see paragraphs B20 and B21);

(b) contracts that have the legal form of insurance, but pass back all significant insurance risk to the policyholder through non-cancellable and mandatory mechanisms that adjust future payments by the policyholder as a direct result of insured losses. For example, some financial reinsurance contracts or some collective contracts (such contracts are normally non-insurance financial instruments or service contracts; see paragraphs B20 and B21);

(c) self-insurance, in other words, the retention of a risk that could have been covered by insurance (there is no insurance contract because there is no agreement with another party);

(d) contracts (such as gambling contracts) that require a payment if a specified future and uncertain event occurs, but do not require, as a contractual precondition for payment, that the event adversely affects the holder. However, this does not exclude the specification of a predetermined indemnity to quantify the loss caused by a specified event, such as death or an accident (see also paragraph B13);

(e) derivatives that expose a party to financial risk, but not insurance risk, because they require that party to make payment solely based on changes in one or more specified interest rates, prices of financial instruments, commodity prices, exchange rates, price indices or rates, credit ratings or credit indices, or another variable, provided that, in the case of a non-financial variable, the variable is not specific to a party to the contract (see CPC 48);

(f) financial guarantee contracts (or letters of credit, credit derivative contracts covering default risk, or credit insurance contracts) that require payments to be made, even if the holder has not recorded losses due to the debtor's failure to make payment obligations on the due dates (see CPC 48);

(h) catastrophe bonds that provide reduced payments of principal, interest, or both, based on a climatic, geological, or other physical variable that is not specific to a party to the contract.

B20. If the contracts described in paragraph B19 create financial assets or financial liabilities, they are within the scope of CPC 48. Among other things, this means that the parties to the contract use what is sometimes referred to as deposit accounting, which involves the following:

(a) one party recognizes the consideration received as a financial liability, rather than revenue;

(b) the other party recognizes the consideration paid as a financial asset, rather than an expense.

B21. If the contracts described in paragraph B19 do not create financial assets or financial liabilities, CPC 47 applies. Under CPC 47, revenue should be recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to the customer in an amount that reflects the consideration to which the entity expects to be entitled.

Significant insurance risk

B22. A contract is an insurance contract only if it transfers significant insurance risk. Paragraphs B8 to B21 discuss insurance risk. The following paragraphs discuss the assessment made to determine whether insurance risk is, or is not, significant.

B23. Insurance risk is significant if, and only if, the insured event obliges the insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e., they have no discernible effect on the economics of a transaction). If significant additional benefits are payable in scenarios with commercial substance, the condition stated in the previous sentence may be satisfied, even if the insured event is extremely unlikely or even if the expected present value (i.e., weighted by probabilities) of the contingent cash flows is a small proportion of the expected present value of all remaining contractual cash flows.

B24. The additional benefits described in paragraph B23 refer to amounts that exceed those that would be paid if no insured event occurred (excluding scenarios that lack commercial substance). These additional values include regulatory and claims assessment expenses, but exclude:

(a) the loss of the ability to charge the policyholder for future services. For example, in a life insurance contract linked to an investment, the death of the policyholder means that the insurer can no longer provide investment management services and charge a commission for it. However, this economic loss to the insurer does not reflect insurance risk, just as the mutual fund manager does not assume insurance risk regarding the possible death of the client. Therefore, the potential loss of future investment management commissions is not relevant when assessing the degree of insurance risk transferred by a contract;

(b) waiver of fees that could be charged for cancellation or surrender due to death. Since the contract created these fees, their waiver does not compensate the policyholder for a preexisting risk. Thus, the fees are not relevant when assessing the degree of insurance risk transferred by a contract;

(c) a payment conditioned on an event that does not cause a significant loss to the contract holder. For example, consider a contract that requires the issuer to pay one million monetary units if an asset suffers physical damage that causes an insignificant economic loss of one monetary unit to the holder. In this contract, the holder transfers to the insurer the insignificant risk of the loss of one monetary unit. At the same time, the contract creates a non-insurance type risk that the issuer has to pay 999,999 monetary units if the specified event occurs. Given that the issuer does not accept significant insurance risk from the holder, this contract does not constitute an insurance contract; and

(d) possible reinsurance recoveries. The insurer accounts for them separately.

B25. The insurer must assess the significance of insurance risk contract by contract, and not with respect to materiality in the financial statements. Thus, insurance risk may be significant even if there is a minimal probability of material losses for an entire portfolio of contracts. This contract-by-contract assessment facilitates the classification of a contract as an insurance contract. However, in the case of a relatively homogeneous portfolio of small contracts, all of which are considered contracts that transfer insurance risk, the insurer does not need to examine each contract in that portfolio to identify a few non-derivative contracts that transfer insignificant insurance risk.

B26. It is concluded from reading paragraphs B23 to B25 that, if a contract stipulates the payment of a death benefit that exceeds the amount payable for survival, the contract is an insurance contract, unless the additional death benefit is insignificant (judged individually by contract, and not by the total portfolio of contracts). As stated in paragraph B24(b), the waiver of cancellation or surrender fees due to death is not included in this assessment if this waiver does not compensate the policyholder for a preexisting risk. Similarly, an annuity contract that pays regular sums for the rest of the policyholder's life is an insurance contract, unless the aggregated life-contingent payments are insignificant.

B27. Paragraph B23 refers to additional benefits. These additional benefits may include an obligation to pay benefits earlier if the insured event occurs earlier and the indemnity is not adjusted for the time value of money. An example is whole life insurance for a fixed amount (in other words, insurance that provides a fixed death indemnity when the policyholder dies, with no expiration date for the coverage). It is certain that the policyholder will die, but the date of death is uncertain. The insurer will suffer a loss on those individual contracts in which the policyholder dies early, even if there is no overall loss in the total portfolio of contracts.

B28. If an insurance contract is separated into a deposit component and an insurance component, the significance of the insurance risk transferred is assessed with respect to the insurance component. The significance of the insurance risk transferred by an embedded derivative is assessed with respect to the embedded derivative.

Changes in the level of insurance risk

B30. A contract that qualifies as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire.

CVM Resolution 98 (Repealed): Approval of Consolidated Technical Pronouncement CPC 11 on Insurance Contracts

Lineage: In force