Welcome to the website of the IFRS Foundation and the IASB

Friday 25 April 2014

Banner graphic

IASB Meeting Summaries and Observer Notes


 IASB / FASB April 2012


 

 

The IASB and FASB continued their discussions on insurance contracts by considering reinsurance and issues related to policy loans and contract modifications (including riders). They also held an education session on the single margin approach tentatively adopted by the FASB.

Reinsurance

The boards tentatively decided that:

  1. For retroactive reinsurance contracts, the residual or single margin included in the cedant's reinsurance recoverable and the reinsurer's insurance contract liability should be amortised over the remaining settlement period in the same manner as the release of the single/residual margin (in line with the pattern of services (for the IASB) or release from risk (for the FASB)).
    All IASB and all FASB members present supported this decision. One IASB member was absent.
  2. An insurer should treat cash flows resulting from contractual features affecting the amount of premiums and ceding commissions that are contingent on claims or benefits experience (often referred to as 'loss sensitive features') as part of the claims and benefits cash flows (rather than as part of the premiums) if they are not accounted for as investment components. An insurer should treat any premium adjustments that are not loss-sensitive in the same way as other changes in estimates of premiums arising from the contract. Any features that provide cedants with a unilateral right (but not an obligation) to pay a premium and reinstate a reinsurance contract should not be considered to be loss sensitive features for the purpose of applying this guidance.
    All IASB and all FASB members present supported this decision. One IASB member was absent.

Measurement of the contract

The IASB tentatively decided that both the cedant and the reinsurer should evaluate whether to account for the reinsurance contract using the building block approach (BBA) or the premium allocation approach (PAA) in the same manner in which an insurer should evaluate a direct insurance contract. In other words, the PAA would be permitted if it would produce measurements that are a reasonable proxy to those that are produced by the BBA.
All IASB members present supported this decision. One IASB member was absent.

The FASB tentatively decided that:

  1. The reinsurer should evaluate whether to account for the reinsurance contract under the building block approach or premium allocation approach in the same manner in which an insurer should evaluate a direct insurance contract. In another words, insurers should apply the BBA rather than the PAA if, at the contract inception date, either of the following conditions is met:
    1. it is likely that, during the period before a claim is incurred, there will be a significant change in the expectations of the net cash flows required to fulfil the contract; or
    2. significant judgement is required to allocate the premium to the insurer's obligation to each reporting period.
    All FASB members supported this decision.
  2. The cedant should account for a reinsurance contract using the same approach (building block approach or premium allocation approach) that the cedant uses to account for the underlying direct insurance contracts. Reinsurance contracts that reinsure both insurance contracts measured using the building block approach and insurance contracts measured using the premium allocation approach, should be separated based on the underlying contract measurement model, with each component being accounted for using the same approach used to account for the underlying direct insurance contracts.
    Six FASB members supported this decision.

Policy loans and contract modifications (including riders)

The boards tentatively decided that in applying the general decisions on unbundling and disaggregation, policy loans should be considered in determining the amount of the investment component to which they relate.

Twelve IASB and all FASB members present supported this decision. One IASB member was absent.

The boards will consider disclosures about the amount of policy loans taken out at a future meeting.

The boards also tentatively decided that:

  1. An insurer should account for contract modifications (ie. riders) that are part of the insurance contract at inception as part of the contractual terms of the contract. Thus the general decisions on unbundling and disaggregation should apply to riders.
    All IASB and all FASB members present supported this decision. One IASB member was absent.
  2. An insurer should derecognise an existing contract and recognise a new contract (under the applicable guidance for the new contract) if it amends the contract in a way that would have resulted in a different assessment of either of the following items had the amended terms been in place at the inception of the contract:
    1. whether the contract is within the scope of the insurance contract standard; or
    2. whether to use the premium allocation approach or the building block approach to account for the insurance contract.
    All IASB and FASB members present supported this decision. One IASB member was absent.
  3. In addition, the IASB tentatively decided that an insurer shall derecognise an existing contract and recognise a new contract if it amends the contract in a way that would have resulted in the contract being included in a different portfolio than the one in which it was included in at initial recognition.
    All IASB members present supported this decision. One IASB member was absent. The FASB plans to consider which additional circumstances will result in derecognition and whether there needs to be application guidance.
  4. When an insurer makes a substantial modification to an insurance contract, the gain or loss on extinguishment of the original contract should be determined by measuring the existing insurance contract using the current entity-specific price that the insurer would hypothetically charge the policyholder for a contract equivalent to the newly recognised insurance contract.
    Twelve IASB and six FASB members present supported this decision. One IASB member was absent.
  5. Insurers should account for non-substantial modifications as follows:
    1. If the modification eliminates the insurer's obligation to provide some of the benefits that the contract would previously have required, the insurer shall derecognise that portion of its obligation (including any related portion of the residual/single margin).
    2. If the modification entitles the policyholder to further benefits, the insurer shall treat the modification as if the amendment was a new standalone contract (ie, the margin is determined in the same way as for a new standalone contract with no effect on the measurement of the original contract)
    Twelve IASB and five FASB members present supported this decision. One IASB member was absent.
  6. Reinsurers and cedants shall present any gains or losses on commutations as an adjustment to claims or benefits and shall not gross up the premiums, claims, or benefits in recognising the transaction on the statement of comprehensive income.
    All IASB and FASB members present supported this decision. One IASB member was absent. The boards will consider disclosures about commutations at a future meeting.

Single margin

The FASB held an education session for the IASB on the single margin approach. The Board was not asked to make any decisions.

The use of other comprehensive income

The IASB and FASB held an education session on how to use other comprehensive income for presenting the effects arising from changes in specified assumptions on the insurance contract liability. The boards were not asked to make any decisions.

Date: 4/18/2012


Agenda Papers