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Insurance Contracts

Date recorded:

The staff introduced the session by highlighting the objectives. The main objective was to identify viable candidates for measurement that are worth pursuing from the pool of existing candidates:

  • Current exit value as proposed by the discussion paper Preliminary Views on
  • Insurance Contracts (DP).
  • Current fulfilment value including a risk margin reflecting the cost of bearing risk.
  • Current fulfilment value as in candidate 2 plus an additional separate margin,calibrated at inception to the premium.
  • Current fulfilment value including a single margin calibrated at inception to the premium (ie similar to candidate 3, but with one overall margin, not two separatemargins).
  • Unearned premium (only for the pre-claims liability of short-duration contracts).

The staff asked the Board what the measurement objective to be applied was:

  • Current exit value provides a clear principle and this leads to most decision-useful information
  • Fulfilment value provides the most relevant information
  • Current exit value is conceptually preferable, but fulfilment value is more consistent with the Board's thinking on revenue recognition and would ameliorate practical issue when applying an exit price notion

The Board had a lengthy and lively discussion on the issue with no clear direction. It was clear that the Board was split over the 'right' measurement attribute for insurance contracts. The chairman noted that the Board now has 4 projects that seem to be inconsistent with each other.

Some Board members asked what makes insurance so special. Others expressed the view that unbundling would take away many of the issues raised during the deliberations. Board members were also concerned about creating hypothetical market transactions where such transactions rarely ever occur. One Board member noted that people were paranoid about recognising day one gains, but not losses and looked for means to avoid recognising such gains.

Finally, the chairman took an indicative vote to which measurement attribute Board members would tentatively prefer. There was a slight majority for a fulfilment value approach.

The staff continued to ask the Board which other potential candidates should be included in the narrower selection and presented them with a list. Some Board members expressed their sympathy for some of those candidates in the list (allocated transaction price approach, an IAS 37 (as currently deliberated) approach and an IAS 39 approach).