The Board discussed the following:

• Assets backing insurance contracts.
• Insurance against credit risk and financial guarantees.
• Disclosure.

Assets Backing Insurance Contracts

Several participants at the financial instruments roundtables expressed concerns about volatility if assets backing insurance liabilities are measured at fair value while insurance liabilities are measured on a cost basis. The Board discussed various remedies proposed by the roundtable discussants, including:

• Relaxing the criteria for classifying held-to-maturity financial assets.
• Creating a new category of financial assets to be held at amortised cost, being assets backing insurance liabilities. The Board was noted that these assets would generally be fixed income securities.
• Creating a new category of 'available-for-settlement' liabilities measured at fair value with changes in fair value recognised in equity.
• Permit fair value hedge accounting when a non-derivative is used as a hedging instrument to hedge interest-rate risk.

After discussion, the Board agreed not to pursue any of the above alternatives (by vote of 10 to 4).

The Board considered whether an entity should be permitted to redesignate financial assets to another IAS 39 category. The Board agreed to allow an entity, on initial adoption of the insurance contract Standard, to redesignate any financial assets to the new proposed category of 'designated at fair value through income'. The Board further agreed to allow redesignation of any financial assets in a similar fashion if an entity changes its accounting policies for insurance contract liabilities. In both cases the cumulative effect of the change in the financial assets would be treated in the same manner as a change to an accounting policy.

The Board considered whether an entity should be permitted to use a fair value model for assets such as investments in associates and owner-occupied property if those assets are held to back insurance liabilities. The Board agreed allow the fair value model for investments in associates backing insurance liabilities but did not agree with respect to owner-occupied property. This question will be reconsidered at such time as IAS 40 is re-examined.

Credit Risk and Financial Guarantees

The Board discussed the treatment of insurance against credit risk and financial guarantees. The Board agreed that if these items meet the definition of a financial instrument they will be dealt with under IAS 39. If, however, they meet the definition of an insurance contract, they will be accounted for under the entity's existing accounting policy. If they are neither insurance contracts nor financial instruments, current proposals in the Improvements project would require them to be initially accounted for under IAS 39 and subsequently under IAS 37. The Board agreed that the effect of this needed to be clarified.

Disclosure

The Board noted the following principles:

• An insurer shall disclose information that identifies and explains the insurance-contract-related amounts reported in its balance sheet, income statements and, if it presents its cash flow statement using the direct method, in the cash flow statement
• An insurer shall disclose information that helps users understand the estimated amount, timing and uncertainty of future cash-flows from insurance contracts
• An insurer shall disclose the fair value of its insurance assets and insurance liabilities from 31.12.2006, and disclose information about their principal characteristics that are pertinent to their value from 31.12.2005

The Board agreed to add implementation guidance in respect of the disclosures. Also, the Board agreed to change the effective date from 31 December 2005 to 31 December 2006. The Board indicated that it intends to provide additional guidance before the fair value disclosures are required and that the disclosures for claims development should be required for the previous 5 years.

The Board intends to publish the exposure draft around the end of the second quarter of 2003.