Insurance Contracts

Date recorded:


Contact boundaries

The IASB discussed where the boundary of an existing insurance contract should be. The contract boundary determines which future cash flows are included in the measurement of the insurance contract. The staff noted that in May 2009 the IASB tentatively determined the boundary between existing and new contracts as the point at which the insurer can cancel the contract or change the pricing or other terms.

Since then, the International Association of Insurance Supervisors (IAIS) had suggested that the cash flows to be taken into account when measuring an insurance contract would be bounded by the earlier of (as applicable):

  • the contractual termination date as extended by any unilateral option available to the policyholder, or
  • the insurer having a unilateral right to cancel or freely re-underwrite the policy, or
  • both the insurer and policyholder being jointly involved in making a bilateral decision regarding continuation of the policy.

The staff had developed this suggestion further and recommended the following contract boundary:

The contract boundary is defined as including all cash flows arising under the contract as a result of events occurring during the period ending on the earlier of:

  • the contract coverage period (as extended by any renewal options available to the policyholder) and
  • the point at which the insurer has an unrestricted ability to cancel or re-underwrite and re-price coverage of the individual contract. For this purpose, restrictions would be ignored if they have no commercial substance (that is, no discernible effect on the economics of the contract).

The Board centred its discussion on the meaning and practical application of 'unrestricted ability to cancel or re-underwrite or re-price' an individual contract as articulated in the staff recommendation. Various Board members were unhappy about how this might be applied in practice, whether the option was open-ended; whether any re-pricing meant that there was a new contract or whether increases in accordance with a contractual formula would keep the re-priced contract within the original contract boundary. Board members were even less enthusiastic about the ability to re-underwrite, which did seem to them to presume a new contract. In addition, there was concern about whether the re-pricing, etc applied to a particular class or an individual contract.

After a long debate, the Board seemed to coalesce around the articulation of the contract boundary developed by the IAIS rather than the staff recommendation. They agreed that this should form the basis of the next steps in this part of the project, although the staff was asked to explore the effect of events arising from contractual terms. (The particular example will be the operation of a non-claims clause in a motor insurance policy in which renewing motorists are classified in 'classes' depending on claims experience under a contractual (or legal) formula; and whether moving from one class to another constitutes a new contract.)



The Board discussed the recognition of rights and obligations arising under an insurance contract, including the treatment of the contract in the period (if any) between when the two parties (insurer and policyholder) enter into the contract and the start of the coverage period. The staff noted that the FASB had already tentatively decided that an entity should recognise an insurance obligation at the earlier of (a) the entity being 'on risk' to provide coverage to the policyholder for insured events and (b) the signing of the insurance contract.

Although Board members had some concerns about their understanding of 'on risk', it was evident that the vast majority (if not all) of the Board agreed that the principle could be re-expressed as 'as insurance obligation arises when the insurer has insurance risk'.

The Board agreed with the staff recommendation (as had the FASB), subject to drafting.

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