Recognition of an insurance contract
The Board discussed a staff recommendation that an insurer should recognise an insurance contract when it becomes party to the contract. This definition is consistent with IAS 39.
The Board did not agree with the staff recommendation and suggested that more clarification around what it mean 'to become a party to the insurance contract' is needed. Concerns were raised that internationally there are a variety of regulatory and legal practices around entering into insurance contract that may affect the answer to the question posed by the Board. For example, in some jurisdictions the act of making an irrevocable offer of an insurance contract may expose the insurer to insurance risk from that point, even before the policyholder accepts the offer. It was not clear how the definition of 'becoming a party to contract' would apply in that case.
Another concern was around the accounting for a time period between entering into the contract and the beginning of a coverage period. In some cases this period can be relatively long, and during that time the policyholder is able to cancel the policy. The staff proposed treating that period as part of an insurance contract, because treating that contract as fully executory until the beginning of the coverage period would not fully reflect the risk an insurer is exposed to from any changes in circumstances in the meantime. A number of views were expressed by the Board members on this proposal. Some members viewed the contract before the start of the coverage period as fully executory. Others observed that once the policy has been issued, even if the loss event occurs before the start of the contractually stated coverage period insurer may be obligated to meet that claim. These members believed that the insurance contract should be recognised from the moment the coverage period begins, but there needs to be more clarification around when the coverage period begins, as this may vary in different jurisdictions and may not be based purely on the contractual terms. Some suggested that the definition should be amended such that: 'an insurer should recognise an insurance contract when it becomes party to the contractual provisions or legal or regulatory requirements'.
The Board asked the staff to clarify how the proposed recognition model would apply in particular fact patterns.
Derecognition of insurance liabilities
The Board agreed that an insurance liability should be derecognised when it no longer qualifies as a liability of the insurer, applying the derecognition principles of IAS 39.
The Board had an education session to discuss the examples of the participating contracts and the proposed accounting for these contracts. A heated debate ensued about whether a participating feature met the definition of a liability or whether it could be viewed as equity. (Will be discussed further at the Wednesday 18 November session.)