Short term insurance contracts
The staff introduced the discussion topic, the modified approach for short term insurance contracts, and provided a summary of the relevant decisions made to date as well as the outreach that had been undertaken. In particular, the staff discussed the feedback on the ED proposals and the Insurance Working Group feedback on the post-ED discussions to date.
The staff proposed two approaches, with the IASB and FASB staffs each supporting different approaches. The IASB staff proposed a "one-model" approach, under which the simplified model for the pre-claims accounting phase of a short term contract is based on the revenue recognition project and serves as a proxy for the building block approach which is then used for the post-claims accounting phase of these contracts. The FASB staff proposed a "two-model" approach, under which the simplified model and the building blocks approach are separate accounting models and short term and long term insurance contracts are different types of contract.
With minor exceptions (principally in the eligibility criteria), the two approaches are expected to have largely similar practical results. The staff noted that it is likely that approximately 90% of the contracts eligible for the simplified under one approach would also be eligible under the other approach. The Boards were, however, unable to reconcile the "one-model" and "two-model" concepts with their understanding of the insurance project overall direction so far and whether specific contract examples would meet the eligibility criteria under the two approaches. The allocated time was largely spent debating whether a one-model approach or a two-model approach should be used and whether that approach was justified by the economics of the underlying transactions.
No decisions were reached and none of the other topics in the Papers were considered. It is emblematic of the current level of progress on this project that one member commented that the Boards had "wasted one and a half hours talking in circles". The Boards directed the staff to prepare additional information for the next meeting. This additional work is primarily a review of insurance contract types to identify those contracts that are likely to meet the eligibility criteria for one approach but not the other so that the Boards could then consider whether changes should be made to the eligibility criteria proposed by the staff in today's meeting.