Welcome to the website of the IFRS Foundation and the IASB

Sunday 21 December 2014

Banner graphic

Insurance Contracts

IASB Meeting Summaries and Observer Notes


 IASB / FASB June 2011


 

 

The IASB and FASB continued their discussion of insurance contracts. They considered the following topics: whether and how to unlock the residual margin, allocation methods for the residual margin, the accounting for acquisition costs and presentation.

Whether to unlock the residual margin

The IASB tentatively decided that the residual margin should not be locked in at inception. Eight IASB members supported and Seven members opposed this decision.

The FASB has already tentatively decided to propose a single-margin approach. However, the FASB also indicated that if it were to adopt an approach that includes both a risk adjustment and a residual margin, they would not favour unlocking a residual margin.

How to unlock the residual margin

The IASB tentatively decided that an insurer should:

  1. adjust the residual margin for favourable and unfavourable changes in the estimates of future cash flows used to measure the insurance liability. Experience adjustments would be recognised in profit or loss. Eleven IASB members supported this decision and four opposed it.
  2. not limit increases in the residual margin. Twelve IASB members supported and three opposed this decision.
  3. recognise changes in the risk adjustment in profit or loss in the period of the change. Nine IASB members supported and six opposed this decision.
  4. make any adjustments to the residual margin prospectively. Ten IASB members supported and five members opposed this decision.

The IASB discussed whether changes in discount rate should be recognised as an adjustment to the residual margin or in profit or loss in the period of the change to the extent that these changes create an accounting mismatch. No decision was made.

The FASB did not vote on how to unlock the residual margin.

Allocation methods for residual margin

The IASB tentatively decided that:

  1. the residual margin should not be negative. All IASB members supported this decision.
  2. insurers should allocate the residual margin over the coverage period on a systematic basis that is consistent with the pattern of transfer of services provided under the contract. Nine IASB members supported and six opposed this decision.

Acquisition costs

The boards tentatively decided that the acquisition costs to be included in the initial measurement of a portfolio of insurance contracts should be all the direct costs that the insurer will incur in acquiring the contracts in the portfolio, and should exclude indirect costs such as:

  • software dedicated to contract acquisition
  • equipment maintenance and depreciation
  • agent and sales staff recruiting and training
  • administration
  • rent and occupancy
  • utilities
  • other general overhead
  • advertising.

Forteen IASB members supported and one opposed this decision. All FASB members supported this decision.

In addition:

  1. the IASB tentatively decided that no distinction should be made between successful acquisition efforts and unsuccessful efforts. 9 IASB members supported and 6 opposed this decision.
  2. the FASB tentatively decided that the acquisition costs included in the cash flows of insurance contracts will be limited to those costs related to successful acquisition efforts. All FASB members supported this decision.

Presentation of the statement of comprehensive income

The boards indicated a preference for the presentation model outlined in Example 2 in Appendix A of Agenda Paper 3A /FASB Memo No. 70A. The example presents the underwriting results of contracts measured under the building-block approach separately from contracts measured using the modified approach and includes volume information as follows:

  1. line items for the underwriting margin of insurance contracts that present the following amounts for the reporting period:
    1. building block approach underwriting margin reflecting:
      1. Change in/release of:
        1. Risk adjustment (IASB)
        2. Residual margin (IASB)
        3. Composite margin (FASB)
      2. experience adjustment related to the current period disaggregated as:
        1. premium due
        2. claims incurred
        3. expenses incurred
        4. expected net changes in the liability for the period
      3. changes in assumptions
      4. gains and losses at initial recognition
    2. modified approach underwriting margin reflecting:
      1. change in/release of
      1. risk adjustment (IASB)
      2. composite margin (FASB � if applicable)
    3. premium revenue (based on the release of the preclaims obligation grossed up for amortisation of acquisition costs)
    4. claims incurred
    5. expenses incurred
    6. amortisation of acquisition costs included in the preclaims obligation
    7. experience adjustments related to the current period
    8. changes in assumptions
    9. changes in additional liabilities for onerous contracts
  2. Investment performance:
    1. Investment income
    2. Interest accreted on the expected net cash flows
  3. Changes in discount rate

Five FASB members supported and two opposed this direction. Seven IASB members supported and Seven opposed this direction. One IASB member was absent. The IASB then indicated that it would not oppose proceeding on this basis. Three IASB members objected to this approach.

The boards discussed whether they would require all insurers to present each of the above line items in all cases on the statement of comprehensive income, rather than in the notes. No decision was made.

Next steps

The boards will continue their discussion of insurance contracts in their July meeting.

Date: 6/13/2011