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Insurance contracts – Education session

Date recorded:

Education session: The discount rate

The Boards held an education session on the choice of the discount rate. Introducing the session, the IASB staff noted that the IASB's ED/2010/8 (and the related FASB Discussion Paper) had two proposals for the discount rate. For participating insurance contracts, for which some or all of the amount and timing of cash flows arising under the contracts may depend on the performance of the assets, the performance of the assets needs to be considered in measuring the corresponding insurance contract liability, either in the discount rate or elsewhere in the building blocks. For non-participating business, the boards proposed that the discount rate should be a risk-free rate plus a liquidity adjustment and to disregard the insurers' own non-performance risk.

As a result of outreach activities and comment letters, the staff identified three groups of discount rates that might be candidates for the most appropriate discount rate:

  • building a discount rate bottom up starting at a risk-free rate and then adding certain factors that are relevant to the measurement of the liability
  • starting top-down from actual or estimated asset earnings and then eliminating certain factors identified that are irrelevant to the measurement of the liability, or
  • use an observable discount rate (for example high quality corporate bond rate) as a practical expedient to approximate either a bottom-up or a top-down approach.

The Boards received three presentations in support of different 'top-down' approaches from Robert Esson (NAIC); Francesco Nagari and Andrew Smith (Deloitte LLP); and Nick Bauer (Eckler Ltd). Each presentation was designed to answer:

  • How does this discount rate reflect the characteristics of the liability?
  • Which factors/risks are included and excluded by this discount rate?
  • What are the sensitivities of both assets and liabilities to these factors in the rate?
  • How complicated is it to derive this rate in practice?

Board members challenged each presenter over certain aspects of their presentation, seeking clarification or expressing concerns about the method suggested.

No decisions were asked for or made.

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