Insurance Contracts

Date recorded:

The Boards held an extended discussion, which seemed to be designed to confirm the elements of the alternative approaches to measuring risk in an insurance contract to be included in the forthcoming exposure draft. The debate was difficult to follow and demonstrated that both Boards and their respective staff remain split both within themselves and between the two groups. Many of the interventions essentially reiterated Board members' previous positions and opinions and did not serve to advance the discussion to any meaningful extent. The net result was one of the worst debates on this project for many months.


Risk adjustment or composite margin

The Boards continue to be finely divided on whether to adopt a risk adjustment with a residual margin or a composite margin approach: the FASB 3-2 in favour of a composite margin approach; the IASB 8-7 in favour of a risk adjustment/ residual margin approach. Consequently, the ED will discuss both.

The Boards agreed (FASB: 5 in favour; IASB: 8 in favour) that should an insurance contract include a separate risk adjustment, the ED should limit the range of permitted techniques by specifying the range of techniques that the Boards consider consistent with the measurement objective (this is similar to the approach to measurement methods adopted in IFRS 2).


Composite margin

The Boards discussed potential approaches to the release of a composite margin subsequent to initial recognition. The staff proposed that the release should be governed by two 'drivers' that would be specified in the ED. The suggested release formula was:

Current period actual premium + current period claims and benefits
Expected value of premiums + Expected value of future claims and benefits

At least one Board member challenged the staff's proposed 'drivers', noting that, in his opinion, the drivers did not capture what the Board should be measuring: the currency amount of premiums and the currency amount of claims had little to do with the risk and uncertainty inherent in insurance contracts.

Other Board members saw the proposed release formula as a sort of 'percentage of completion' formula for the contracts, which they considered to be a useful way of releasing the composite margin.

Ultimately, the staff proposal was accepted by the FASB (3 in favour) and the IASB (13 in favour). The Boards seemed to choose not to reconsider the issue about the recognition of changes in estimates in a composite margin approach.


Level of measurement (unit of account)

The Boards discussed the level of aggregation that an insurer should adopt for measurement purposes.

Ultimately, the Boards agreed that if measurement includes a separate risk adjustment, that adjustment should be determined for a portfolio of insurance contracts. The risk adjustment should not reflect the effects of diversification between portfolios or negative correlation between portfolios (FASB: 5 in favour; IASB 14 in favour).

In addition, the Boards agreed unanimously that the ED should carry forward the definition of a 'portfolio of insurance contracts' in IFRS 4: 'contracts that are subject to broadly similar risks and are managed together as a single portfolio'.



The Boards discussed the proposed disclosure requirements for the forthcoming exposure draft. In particular they discussed a revised disclosure principle:

To help users of financial statements understand the amount, timing and uncertainty of future cash flows arising from insurance contracts, an entity shall disclose qualitative and quantitative information about:

  • the amounts recognised in its financial statements arising from insurance contracts; and
  • the nature and extent of risks arising from those contacts

A Board member noted that the disclosure principle should also include the 'nature' of cash flows, because an insurance contract involves a number of cash flows.

Another Board member challenged the staff to demonstrate how the disclosures proposed were responsive to users' needs and suggested requirements.

Some Board members challenged the practicability of the requirements as written, noting that for some large multi-national insurers, the staff proposals would result in a 'phone book' of disclosures. No vote was taken on these proposals.

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