Margins: Losses on initial recognition
The Board noted that they had previously decided that the over-all margin at inception should be measured by reference to the premium and that no 'day one' gains should arise. At this meeting, the Board agreed that if a premium was not sufficient to cover the obligations then the difference would be recognised in profit or loss on inception.
A Board member suggested that the exposure draft should describe this situation in terms similar to 'On contract origination, if the contract represents and asset no asset [and thus a gain in profit and loss] is recognised; if the contract represents a liability, recognise the liability and the associated expense in profit or loss'.
Should the measurement approach include specified margins?
There was little support for a staff recommendation that a measurement approach should include a separate risk margin that is remeasured at each reporting date. At least one Board member suggested that he did not know what that margin would be or how to calculate it!
Are margins part of the insurance liability?
The Board was split on whether all margins identified by the staff are part of the insurance liability rather than a separate liability outside the insurance liability. There was a high level of concern over the consequences of the staff recommendations.
The staff noted that the treatment of acquisition costs was equally relevant to the fulfilment notion and exit price notion. The discussion concentrated on what constituted an acquisition cost. US GAAP (for example, FAS 91 on loan origination costs) has a rather broad definition that includes selling, underwriting and initiation costs; IAS 39 limits transaction costs to incremental costs.
The Board agreed that acquisition costs should be defined narrowly - those incremental to the contract (which, by definition, means they must be direct costs).
Acquisition costs should be expensed and some of the premium recognised as revenue. The staff suggested that this treatment provides transparency about acquisition costs incurred during the period and acknowledges that pricing of insurance contracts includes 'premium loads' to recover such costs.