The IASB and FASB continued their discussions on insurance contracts on the topic of disclosures. In addition, the IASB continued its discussions on the risk adjustment and heard a report on the FASB's recent decisions on the single margin approach.
The IASB and FASB tentatively decided to retain the disclosures proposed in paragraphs 90-97 of the IASB's exposure draft (ED) Insurance contracts, with changes as follows:
a. to delete the requirement that an insurer shall not aggregate information relating to different reportable segments (ie paragraph 83 of the ED) to avoid a conflict with the principle for the aggregation level of disclosures. The level of aggregation could thus vary for different types of qualitative and quantitative disclosures. However, the standard would add to the examples listed in paragraph 84 of the ED by stating that one appropriate aggregation level might be reportable segments. All IASB and FASB members supported this decision.
b. to require the insurer to disclose separately the effect of each change in inputs and methods, together with an explanation of the reason for the change, including the types of contract affected. Fourteen IASB members and seven FASB members supported this decision. One IASB member voted against.
c. for contracts in which the cash flows do not depend on the performance of specified assets (ie non-participating contracts), to require disclosure of the yield curve (or range of yield curves) used. Fourteen IASB members and seven FASB members supported this decision. One IASB member voted against.
d. to require the maturity analysis of net cash outflows resulting from recognised insurance liabilities proposed in paragraph 95(a) of the ED to be based on expected maturities and to remove the option to base maturity analysis on remaining contractual maturities. Furthermore, within the context of time bands, to require the insurer to disclose, at a minimum, the expected maturities on an annual basis for the first five years and in aggregate for maturities beyond five years. Fourteen IASB members supported this decision and one opposed it. In place of this disclosure, the FASB would rely on its tentative decisions relating to risk disclosures for financial institutions. These tentative decisions had been made in its project on financial instruments at the FASB board meeting held on 7 September 2011. Those disclosures would apply to insurance entities.
In addition, the IASB tentatively decided to delete the proposed requirement in paragraph 90(d) of the ED to disclose a measurement uncertainty analysis and to align (in due course) that disclosure with the disclosure for fair value measurements in IFRS 13 Fair Value Measurement, as appropriate. Fourteen IASB members supported this decision and one member opposed it. The FASB decided to retain this disclosure. Five FASB members supported this decision and two opposed it.
Risk adjustment: Objective and confidence level disclosure
The IASB tentatively decided that:
a. the objective of risk adjustment should be the 'compensation the insurer requires for bearing the uncertainty inherent in the cash flows that arise as the insurer fulfils the insurance contract'; and that
b. the application guidance should clarify that:
i. the risk adjustment measures the compensation that the insurer would require to make it indifferent between (1) fulfilling an insurance contract liability that would have a range of possible outcomes or (2) fulfilling a fixed liability that has the same expected present value of cash flows as the insurance contract. For example, the risk adjustment would measure the compensation that the insurer would require to make it indifferent between (1) fulfilling a liability that has a 50 per cent probability of being 90 and a 50 per cent probability of being 110 or (2) fulfilling a liability of 100.
ii. in estimating the risk adjustment, the insurer should consider both favourable and unfavourable outcomes in a way that reflects its degree of risk aversion. The boards noted that a risk-averse insurer would place more weight on unfavourable outcomes than on favourable ones.
All IASB members agreed with this proposal.
In addition the IASB tentatively decided to retain the confidence level equivalent disclosure that had been proposed in paragraph 90(b)(i) of the ED. Eleven IASB members supported this decision.
Risk adjustment: Techniques and inputs
The IASB tentatively decided:
a. not to limit the range of available techniques and the related inputs to estimate the risk adjustment; and instead:
b. to retain, in the application guidance the list of characteristics, as proposed in paragraph of B72 of the ED, that a risk adjustment technique should exhibit if that technique is to meet the objective of the risk adjustment.
Twelve IASB members supported this decision.
The IASB also tentatively decided to retain as examples the three techniques proposed in the ED (confidence levels, conditional tail expectation and cost of capital), together with the related application guidance. All IASB members supported this decision.
Single margin approach
At its May 2011 meeting, the FASB tentatively decided that the insurance contract measurement model should use a single margin rather than an explicit risk adjustment and residual margin. The FASB staff reported on the tentative decisions reached regarding the single margin at the FASB board meeting held on 7 September 2011.
Both boards will continue their discussion on insurance contracts in the week commencing on 19 October 2011.