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Insurance Contracts

IASB Meeting Summaries and Observer Notes


 IASB November 2012


 

Joint meeting

The IASB and FASB met on 20 November 2012 to continue their joint discussions of the proposed Insurance Contracts Standard. The boards discussed the discount rate for cash flows that are not subject to mirroring and that are affected by asset returns.

Discount rate for cash flows that are not subject to mirroring and that are affected by asset returns

The boards tentatively decided to clarify that, for cash flows in an insurance contract that are not subject to mirroring and that are affected by asset returns, the discount rate that reflect the characteristics of the cash flows shall reflect the extent to which the estimated cash flows are affected by the return from those assets. This would be the case regardless of whether the:

  1. transfer of the expected returns of those assets are the result of the exercise of the insurer’s discretion, or
  2. the specified assets are not held by the insurer.

Twelve IASB members and all FASB members agreed with this decision.

The boards also tentatively decided that when there is any change in expectations of cash flows used to measure the insurance contracts liability (ie any expected change in the crediting rate), an insurer should reset the locked-in discount rate that is used to present interest expense for those cash flows in the insurance contract that are not subject to mirroring and are affected by asset returns.

Fourteen IASB members and all FASB members agreed with this decision.

IASB-only meeting

The IASB met on 21 November 2012 to discuss presentation and disclosure requirements and a proposed approach for future fieldwork.

Presentation requirements

The IASB tentatively decided that:

  • An entity should present all rights and obligations for all insurance contracts on a net basis in the statement of financial position. All IASB members agreed with this decision.
  • An entity should be required to present separate line items for insurance contracts and reinsurance contracts in the statement of financial position. Fourteen IASB members agreed with this decision.
  • The general requirements of IAS 1 Presentation of Financial Statements are sufficient to specify the presentation requirements for the statement of comprehensive income for insurance contracts. Fourteen IASB members agreed with this decision.

Disclosure requirements

Disclosure requirements for participating contracts

The IASB tentatively decided that, for contracts with cash flows with a contractual link to underlying items, an insurer should disclose:

  1. the carrying amounts of those insurance contracts; and
  2. if an insurer measures those contracts on a basis other than fair value, and discloses the fair value of those underlying items, the extent to which the difference between the fair value and the carrying value of the underlying assets would be passed to policyholders.

All IASB members agreed with this decision.

Disclosure requirements for the presentation of earned premiums in the statement of comprehensive income

The IASB tentatively decided that, for all insurance contracts, an insurer should disclose a reconciliation from the opening to the closing balance of the aggregate carrying amount of insurance contract liabilities and insurance contract assets, showing separately:

  1. the remaining balance of liabilities for remaining coverage but excluding any amounts that are attributable to losses on initial recognition (for the premium allocation approach, this will be the unearned premium);
  2. liabilities for remaining coverage that are attributable to:
    1. losses on initial recognition; and
    2. subsequent changes in estimates that are immediately recognised in profit or loss (for the premium allocation approach, this will be the additional liabilities for onerous contracts); and
  3. liabilities for incurred claims.

All IASB members agreed with this decision.

The IASB tentatively decided that, for contracts that are accounted for using the building block approach, an insurer should disaggregate insurance contract revenue into inputs to the measure of that revenue in the period.

For example an insurer should disclose:

  1. the probability-weighted claims, benefits and expenses that are expected to be incurred in the period;
  2. an allocation of expected acquisition costs;
  3. the risk margin relating to that period’s coverage; and
  4. the margin allocated to that period.

Thirteen IASB members agreed with this decision.

The IASB tentatively decided that, for contracts that are accounted for using the building block approach, an insurer should disclose the effect of insurance contracts written in the period on the insurance contract liability, showing separately the effect on:

  1. the expected present value of future cash outflows, showing separately the amount of acquisition costs;
  2. the expected present value of future cash inflows;
  3. the risk adjustment; and
  4. the residual margin.

All IASB members agreed with this decision.

The IASB tentatively decided that an insurer should disclose a reconciliation from premium receipts to revenue. Nine IASB members agreed with this decision.

Disclosure requirements for transition

The IASB tentatively decided that, in the period in which the new insurance contracts standard is initially applied, disclosure of the current period and prior period line item amounts that would have been reported in accordance with previous accounting policies in IFRS 4 Insurance Contracts should not be required.

All IASB members agreed with this decision.

Proposed plan for fieldwork

The IASB considered a proposed plan for a third round of fieldwork with preparers. In addition, the IASB considered a proposed plan for fieldwork with users of financial statements. Specifically, the IASB discussed the following objectives for fieldwork that is undertaken as part of the re-exposure of the Insurance Contracts proposals:

  1. to understand how the targeted proposals would be applied in practice;
  2. to evaluate the costs and benefits of the targeted proposals; and
  3. to assess how the proposed approach will help insurers to communicate with users of their financial statements.

The IASB staff reported that they intend to:

  1. invite the participants from previous rounds of field tests to participate and in addition to invite new participants, particularly from regions not previously represented;
  2. pursue collaboration with standard-setters and regional bodies in conducting fieldwork;
  3. develop the fieldwork questionnaire and other materials as the forthcoming Re-exposure Draft is finalised so that entities can conduct the fieldwork during the comment letter period; and
  4. present a preliminary analysis of the results at the same time as the comment letter analysis and the views received during the outreach activities. The results of the fieldwork, together with the views expressed in the comment letters, would then be taken into consideration when the IASB re-deliberates the proposals in the forthcoming Re-exposure Draft.
                No decisions were made.

Next steps

The IASB will continue its discussions on the proposed Insurance Contracts Standard at its December 2012 meeting. The IASB will continue its joint discussions with the FASB on the proposed Insurance Contracts Standard at their January 2013 meeting.

Date: 11/20/2012