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Insurance Contracts

IASB Meeting Summaries and Observer Notes


 IASB / FASB March 2012


 

 

The IASB and FASB continued their discussions on insurance contracts by considering the unit of account and separation of investment components from the insurance contract.

Unit of account

The IASB tentatively decided that:

  1. A portfolio of insurance contracts should be defined as contracts that are:
    1. subject to similar risks and priced similarly relative to the risk taken on; and
    2. managed together as a single pool.
  2. The unit of account used to determine the residual margin and perform the onerous test should be the portfolio.
  3. The unit of account used to release the residual margin should not be prescribed. However, the release of the residual margin should be performed in a manner consistent with the objective of releasing the residual margin over the coverage period to the period(s) in which the service is provided.

Nine IASB members supported these decisions and five opposed them.

The FASB tentatively decided that:

  1. a portfolio of insurance contracts should be defined as contracts that are:
    1. subject to similar risks and priced similarly relative to the risk taken on; and
    2. have similar duration and similar expected patterns of release of the single margin.
  2. the unit of account used to determine and release the single margin, and perform the onerous contract test should be the portfolio.

All FASB members agreed with these decisions.

Separation of investment components from the insurance contract

The IASB and FASB tentatively decided that:

  1. an investment component in an insurance contract is an amount that the insurer is obligated to pay the policyholder or a beneficiary regardless of whether an insured event occurs.
    Nine IASB members and all FASB members supported this decision and five IASB members opposed it.
  2. In the statement of financial position, insurers should not be required to present investment components separately from the insurance contract. However insurers should disclose both:
    1. the portion of the insurance contract liability that represents the aggregated portions of premiums received (and claims / benefits paid) that were excluded from the statement of comprehensive income; and
    2. the amounts payable on demand.
    Eleven IASB members and four FASB members agreed with these decisions and three IASB members and three FASB members opposed it.

In addition, the IASB tentatively decided that insurers should exclude from the aggregate premium presented in the statement of comprehensive income the present value of the amounts that the insurer is obligated to pay to policyholders or their beneficiaries regardless of whether an insured event occurs, determined consistently with measurement of the overall insurance contract liability.

Twelve IASB members supported this decision and two opposed it. The FASB did not vote on this issue.

Both boards directed the staff to consider whether any investment components (as defined) are sufficiently distinct from the insurance component that they should be recognised separately and measured applying the financial instrument standard, rather than the insurance contracts standard.

Next steps

Both boards will continue their discussion on insurance contracts in the week commencing 16 April 2012.

Date: 3/20/2012