Welcome to the website of the IFRS Foundation and the IASB

Thursday 21 August 2014

Banner graphic

Insurance Contracts

IASB Meeting Summaries and Observer Notes


 IASB / FASB March 2011


 

 

The IASB and FASB continued their discussions on insurance contracts by considering the following topics: alternative presentation models, allocation of the composite margin in profit and loss, whether the boards should permit or require a practical expedient for the discount rate, education sessions on the risk adjustment and on an alternative approach to deriving a discount rate, the discount rate for participating contracts, the timing of initial recognition and the definition of an insurance contract.

Alternative presentation models

The boards discussed several presentation approaches for the performance statement for insurers. The boards directed the staff to seek input on these approaches from the Insurance Working Group and from other users of insurance financial statements to help the boards to understand which approaches are most likely to meet the needs of users and whether those approaches would cause practical difficulties for the preparers of the financial statements.

The boards were not asked to make any decisions on this topic.

Composite margin-examples of run-off patterns

The boards considered alternative ways by which the composite margin could be allocated through profit or loss ('run off') in the statement of comprehensive income.

The boards were not asked to make any decisions on this topic.

Practical expedient for the discount rate

The boards discussed whether a practical expedient should be provided for determining the discount rate for a particular subset of entities.

The boards tentatively decided not to provide a practical expedient for determining the discount rate. Fourteen IASB members supported this decision, and one voted against.

The majority of the FASB members also supported this decision but noted that they would review this issue when they considered the scope and definition, particularly if those decisions would lead to contracts issued by non-financial institutions being within the scope of the standard.

Discount rate for participating contracts

The boards discussed the discount rate for insurance contracts that contain participating features. The boards tentatively decided to:

  1. clarify that the objective of the discount rate used to measure participating insurance contracts should be consistent with the discount rate used to measure non-participating insurance contracts.
  2. provide guidance that to the extent that the amount, timing or uncertainty of the cash flows arising from an insurance contract depend wholly or partly on the performance of specific assets, the insurer should adjust those cash flows using a discount rate that reflects that dependency.

All the IASB and FASB members supported this decision.

Recognition

The boards tentatively decided that insurance contract assets and liabilities should initially be recognised when the coverage period begins, and to require the recognition of an onerous contract liability in the pre-coverage period if management becomes aware of onerous contracts in the pre-coverage period. All the FASB members and ten IASB members supported this decision (five voted against).

Definition of an insurance contract

The IASB's exposure draft (ED) Insurance Contracts and the FASB's Discussion Paper Preliminary Views on Insurance Contracts (DP) proposed to define an insurance contract as 'a contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder'. The boards tentatively decided to confirm the proposal in the ED and DP that:

  1. an insurer should consider the time value of money in assessing whether the additional benefits payable in any scenario are significant.
  2. a contract does not transfer significant insurance risk if there is no scenario that has commercial substance in which the insurer can suffer a loss, with loss defined as an excess of the present value of net cash outflows over the present value of the premiums.

All the FASB members and twelve IASB members supported this decision (three voted against).

Next steps

The boards will continue their discussion on this project at their joint meeting in the week of 21 March 2011.

Education session on the risk margin

The IASB and FASB invited a guest speaker to provide an education session on how in practice a risk margin is calculated using a cost of capital approach and the linkage to the determination of the best estimate liabilities. The external presenter was Joachim Oechslin from Munich Re. The discussion will be continued on 22 March 2011 with presentations by other guest speakers.

The boards were not asked to make any decisions on this topic.

Education session on an alternative approach to deriving a discount rate

The IASB and FASB invited guest speakers to present an approach that derives a yield curve for a discount rate for all cash flows expected at a given duration by:

  • identifying those liability cash flows that are matched in duration with the cash flows from the insurer's existing asset portfolio
  • considering the reinvestment needs for cash flows that are not matched in duration, and
  • considering the effect of options and guarantees embedded in the liabilities.

The external presenters were Jean-Michel Pinton and Baptiste Brechot from CNP Assurances and Eric Meistermann, from Deloitte.

The boards were not asked to make any decisions on this topic.

Date: 3/14/2011