Date recorded:

Versicherungsverträge – Abzinsungssatz für Verträge, bei denen die Zahlungsströme, auf die das Spiegeln keine Anwendung findet, von erwarteten Vermögensrenditen beeinflusst werden

The Staff paper 2A/95A considers the treatment of a contract whose cash flows are affected by expected asset returns, but for which the mirroring approach does not apply. For those contracts, the Staff proposed to:

  1. Clarify how the tentative decisions made to date regarding the discount rate might be applied to cash flows that are affected by expected asset returns
  2. Consider whether, and if so, when, the discount rate used to present interest expenses in profit or loss should be reset from the discount rate at inception of the insurance contract. Based on prior tentative decisions the interest expense for non-participating contracts is determined using the discount rate at inception.

Some insurance contracts provide an investment return to the policyholder that is affected by the performance of the insurer’s assets. Consequently, the amount, timing or uncertainty of some of the cash flows of those insurance liabilities is affected by the performance of these assets even if there is no contractual linkage between the cash flows and the assets’ return i.e. the insurance contract is a non-participating insurance contract.

The Boards have tentatively decided the “mirroring approach” applies only to those contracts with contractual features that provide policyholders with the right to share in the return from specified underlying assets: participating insurance contracts.

Both Boards have also agreed that the discount rate for cash flows arising from a participating contract should reflect the dependence of those cash flows on the performance of those assets and the mirroring approach requires the use of the assets accounting value as a direct representation of this principle. In arriving at these tentative decisions, the Boards clarified that the objective of the discount rate used to measure participating insurance contracts should be consistent with the objective of the discount rate used to measure non-participating insurance contracts (i.e., to reflect the characteristics of the cash flows of the liability).

Insurers questioned how these discount rate decisions would apply to non-participating contracts that contain cash flows that are affected by the insurer’s own asset returns. It was also noted that previous Staff papers have sometimes used the term “participating contracts” inconsistently and a good example of this incorrect classification is the universal life contract. The Staff is of the view that the universal life contract does not meet the definition of a participating contract. Consequently, these contracts are not subject to any tentative decisions specifically aimed at participating contracts (e.g., the “mirroring approach”).

During the discussion we noted that the main objection to the clarification regarding the discount rate was whether there really was a need for such clarification. A general model already requires the future cash flows be discounted for the time value of money using a current discount rate that reflects the characteristics of the insurance contract liabilities. It was noted that further clarification would move the current draft to a rules-based rather principles-based approach. The concern was expressed in particular in the situation where there is no contractual link between assets and liabilities.

The majority of FASB and IASB members eventually supported the Staff recommendation that for contracts whose cash flows are not subject to the mirroring approach and are affected by asset returns:

  1. The Boards should clarify that the discount rate that reflects the characteristics of the contract’s cash flows shall reflect the extent to which the estimated cash flows are affected by the return from those assets. This would be the case regardless of whether the:
    1. transfer of the expected returns of those assets are the result of the exercise of insurer’s discretion, or
    2. the specified assets are not held by the insurer.
  2. Upon any change in expectations of the crediting rate used to measure the insurance contracts liability, an insurer shall reset the locked-in discount rate that is used to present interest expense.


Ausweis von Änderungen des Abzinsungssatzes für Verträge, deren Zahlungsströme nicht dem Spiegelbildansatz unterliegen und von Vermögensrenditen beeinflusst werden

Paper 2A/95A also covered the presentation of the interest expense for these non-participating contracts because in of the May 2012 decision to split the impact of current interest rates on the discount rate used to measure an insurance contract between Other Comprehensive Income (“OCI”) and the income statement. Changes in the insurance liability arising from changes in the discount rate due to movement in market interest rates would be reflected in the OCI with interest expense in the profit or loss being based on the discount rate locked in at inception of the insurance contract.

The Boards also decided that insurers cannot present in OCI changes in the insurance liability arising from changes in interest-sensitive cash flow assumptions – in other words the same probability weighted cash flows estimate would need to be run using the two discount rate yield curves, all other assumptions being the same. The first curve would be that from the market interest rates at the current balance sheet date and the second curve being that from the locked-in interest rates which were current at the inception of the various layers of in-force insurance contracts.

It was noted that these Boards’ tentative decisions were subject to future discussions on the treatment of participating insurance contracts. In the October 2012 joint board meeting, the Boards discussed participating contracts and noted that the mirroring decisions would take precedence over all other approaches including the “OCI solution”.

As a result, for cash flows arising from participating features for which the mirroring decisions apply, an insurer would present changes in the insurance contact liability through income consistently with the presentation of changes in the underlying assets thus reducing the effect of any accounting mismatches.

Staff expressed the view that periodically resetting the discount rate applied in determining interest expenses for cash flows that are affected by the return from assets to which mirroring does not apply would result in more useful information because the resetting of the discount rate allows better reflection of the economics of the affected cash flows. The greater relevance is due to the fact that these insurance contracts award the policyholder with a crediting rate that is similar to a floating rate of a financial instrument. Presenting the cost of the time value of money for these contracts in a way that reflects the floating nature of the crediting rate appears to be more relevant than using a fixed discount rate. This latter requirement should continue to apply to all other non-participating insurance contracts where assets values do not affect the cash flows.

The Staff suggested the an insurer shall be required to reset the discount rate of these contracts when:

  • the crediting rate changes (alternative 1a)
  • the crediting rate expectations change (alternative 1b); or
  • the book yield of the assets backing these contracts change (alternative 2)

The book yield would include the blended yield of the assets in question that is the effective interest rate of those accounted at amortised cost or fair value through OCI and the market yield for the others.

The Staff recommended Alternative 1b as it aligns the presentation in profit or loss with the change in the liability recognised on balance sheet. This approach limits the amounts reported in OCI to changes in the insurance liability that reverse over time.

IASB members voted unanimously to support the IASB staff recommendation but amended it to state that the new IFRS would require that for cash flows not subject to the mirroring approach and are affected by asset returns to have the time value of money expense presented through profit or loss being recalculated whenever expectations of the crediting rate change.

FASB members unanimously supported the IASB decision and noted that the decision only applies to cash flows that are subject to discretionary crediting rates.


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