Welcome to the website of the IFRS Foundation and the IASB

Saturday 26 July 2014

Banner graphic

Insurance contracts

IASB Meeting Summaries and Observer Notes


 IASB / FASB October 2012


 

IASB-only education session

The IASB held an education session to continue its discussions of the proposed Insurance Contracts Standard. The IASB discussed the presentation approach in the statement of comprehensive income for premiums and claims, non-claims fulfilment costs and acquisition costs.

No decisions were made.

IASB-FASB joint sessions

The IASB and FASB continued their joint discussions on the Insurance Contracts project where they discussed:

  • the time value of money in the premium allocation approach and the presentation of changes in the liability for participating contracts; and
  • how premiums and claims, non-claims fulfilment costs and acquisition costs should be presented in the statement of comprehensive income.

Time value of money in the premium allocation approach

The boards tentatively decided that that the discount rate at inception of the contract should be used to measure the liability for remaining coverage, when it is accreted or discounted.

All IASB members and all FASB members agreed.

The boards discussed how the decision to present in Other Comprehensive Income (OCI) changes in the insurance liability arising from changes in discount rates would apply to the presentation of the liability for incurred claims for contracts to which the premium allocation approach is applied. The boards tentatively decided that when the liability for incurred claims is discounted, an insurer should use the rate at the inception of the contract to determine the amount of the claims and interest expense in profit or loss. That rate is subsequently locked in.

Six FASB members agreed with this decision. Eleven IASB members preferred using the rate on the date the claim is incurred. However, thirteen IASB members agreed to use the rate at the inception of the contract, for the sake of convergence.

Participating contracts

The boards considered previous tentative decisions that apply to contracts with participating features for which the mirroring approach would apply. In particular, they noted that the mirroring decision would take precedence over the tentative decision that insurers should present in OCI changes in the insurance contract liability arising from the effect of changes in the discount rate. As a result, for contracts with participating features where the mirroring decision applies, insurers would present changes in the insurance contract liability in the statement of comprehensive income consistently with the presentation of changes in the directly linked underlying items. No decisions were made.

The FASB tentatively decided that, for contracts to which the mirroring decisions do not apply and where the contractual obligation to the policyholder is directly linked to the fair value of the underlying items, changes in the insurance liability should be presented in profit or loss.

All FASB members agreed with this decision.

Presentation in the statement of comprehensive income

Premiums and claims

The boards tentatively decided that premiums and claims presented in an insurer’s statement of comprehensive income should be determined by applying an earned premium presentation, whereby premiums are allocated to periods in proportion to the value of coverage (and any other services) that the insurer has provided in the period, and that claims should be presented when incurred.

Thirteen IASB members and five FASB members agreed with this decision. The FASB also asked the FASB staff when drafting to consider the inclusion of application guidance about other approaches that may meet the earned premium principle, noting that the description of the approach within the Agenda Papers was too prescriptive.

Non-claims fulfilment costs

The boards tentatively decided that in an earned premium presentation:

  1. The portion of premium allocated to cover non-claims fulfilment costs should be equal to the originally expected non-claims fulfilment costs included in the measure of the building block liability.
  2. The premium allocated to cover non-claims fulfilment costs should be included in earned premium in the periods in which the costs are expected to be released from the liability for remaining coverage, ie when it is expected that they will be either incurred or added to the liability for incurred claims.
  3. The amounts presented as expenses should be the actual costs incurred or be added to the liability for incurred claims in the period.

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

Acquisition costs

The IASB tentatively decided that the cash flows relating to acquisition costs should be recognised in the statement of comprehensive income over the coverage period. (This decision is consistent with a decision previously made by the FASB.)

Fourteen IASB members agreed with this decision. One IASB member abstained.

The FASB tentatively decided that an insurer should disaggregate in the statement of financial position the insurance contracts liability into the expected cash flows to fulfil the insurance obligation and the margin. Acquisition costs should be reported as part of the margin (ie the margin includes the acquisition costs expected to be paid and is reduced when those acquisition costs are paid).

Five FASB members agreed with this decision.

The boards tentatively decided that acquisition costs should be recognised in the statement of comprehensive income in a way that is consistent with the proposed allocation of the residual/single margin. In other words:

  1. For the IASB, in a way that is consistent with the pattern of transfer of services provided under the contract.
  2. For the FASB, as the insurer satisfies its performance obligations to stand ready to compensate the policyholder if a specified uncertain future event adversely affects the policyholder, which is when the insurer is released from exposure to risk as evidenced by a reduction in the variability of cash outflows. Consequently, the margin recognised should be grossed up for the amount of acquisition costs recognised.

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

Date: 10/15/2012