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Insurance contracts – Education session

Date recorded:

Education session on 'unbundling'

The Boards held an education session to understand the effect, costs and benefits of separating insurance contracts into insurance and non-insurance components; referred to as 'unbundling', in which external presenters outlined practical considerations in response to the unbundling proposal set forth within the IASB's Exposure Draft and FASB's Discussion Paper.

In providing relevant examples, including simplified unit-linked insurance contract examples, external presenters suggested certain potential concerns with current unbundling proposals, including:

  • Significant amounts of time and costs involved in unbundling, although no distinction of anticipated costs were made
  • Application of judgement to allocate acquisition costs and surrender charge income to the different components of a contract in unbundling, whereby the treatment of acquisition costs may be different between current proposals within financial instruments, revenue recognition and insurance contracts
  • Application of judgement by insurers in determining how much of the portfolio's expense cash flows should be attributed to the investment management of any unbundled component and how much relates to the insurance component
  • The lack of explicit investment management fee specificity within insurance contracts leading to application of further judgement in either allocating the fee or treating the whole balance as related to the financial liability
  • Profit profiles for insurance components depending on amortisation of residual margins, which may not be significantly different from unbundled account balance
  • Different measurements for contracts that are similar economically if some are unbundled and others bundled.

Noting the above, certain possible benefits for unbundling were noted, including:

  • The consistent treatment of financial instrument elements within insurance contracts to that of standalone financial instruments
  • The possible reduction of accounting mismatches associated with deposit elements, embedded derivatives.

Certain members of the Boards considered whether variances in bundling / unbundling, by way of examples provided by the external presenters, were the result of economic or accounting consequences, while also considering if more value would be provided by disclosing the source of earnings within the financial statements as opposed to applying the unbundling proposal. Other members noted that unbundling often limits the variability in reporting, while also providing further clarity as to underlying costs and earnings in the period.

No decisions, however, were sought or reached at this meeting.

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