The staff noted that in the Boards' educational session on this topic on 17 March 2010 the risk adjustment included in the proposed measurement for insurance contracts. The discussion in that session focused on:
- the objective for a risk adjustment under the proposed measurement.
- the numerous methods that could be used to calculate a risk adjustment.
- the connection between these two; that is, the degree to which available methods could or should be narrowed down as a result of the objective for the risk adjustment.
The debate that followed was as testy as that in the education session. The Boards were not in favour of the original staff recommendation (not requiring a particular method for determining a risk adjustment), nor did they wish to limit the alternatives in an artificial way. Hence, they were faced with developing an objective for the risk margin or abandoning the idea totally and adopting a composite margin.
After a long debate, the Boards remained divided. The IASB voted 8 in favour of developing an Objective for the risk adjustment; 7 in favour of adopting a composite margin approach. The FASB voted the opposite way: 1 in favour of developing an Objective and 4 in favour of adopting the composite margin approach.
In a follow-on vote, a majority of the IASB voted that the refined objective should be the amount the insurer would rationally pay to be relieved of the risk (i.e., the objective of the risk adjustment used in the revised IAS 37).
This topic was revisited in an attempt to achieve consensus between the Boards. Like the Boards, staff on the project were split, some viewing payments arising from the participating feature as contractual cash flows as any other cash flows arising under the contract; and some would recognise the liability up to amount of the legal or constructive obligation and regard the remaining part as equity.
Another energetic debate ensued. Some Board members were concerned that participation features should be limited to the insurance risk element and should not extend to pools of investment risk. Were investment risks to be included, the conclusions reached in the Liabilities and Equity project might have to be revisited-for example with respect to cumulative preferred shares.
The Boards' views on what constituted a constructive obligation were tested and explored. Many Board members suggested that they wanted to support the view that payments arising from the participating feature as contractual cash flows as any other cash flows arising under the contract, but were concerned that this allowed too much discretion. Others thought that the notion of a constructive obligation applied correctly and intelligently would get you to the correct answer.
Ultimately, the IASB Chairman called the vote. The IASB were strongly in favour of the view that payments arising from the participating feature as contractual cash flows as any other cash flows arising under the contract; the FASB were evenly split between the two views until one FASB member, professing agnosticism on this topic, switched to support the IASB majority.
Possible disclosure requirements
The Board agreed in principle that the insurer should describe and explain its participating contracts and the conditions impacting amount and timing of payments. Details should be given regarding in which pool policyholders participate, this may be a specific pool of contracts or assets or the overall performance of the entity. Information about which amounts would eventually flow to shareholders and which to policyholders is important information to users of the financial statements. Users would also be interested in any loss-absorbing characteristics of liability components.
The Board agreed that a starting point would be the disclosures required in IFRS 4 IG32(g), IG64 (c) and IG65F. The Board had some specific comments on proposed disclosure of asset risk and risk mitigation through participating policies - in particular about the practicability of the disclosures - that the staff shall address in drafting.