Insurance contracts

Date recorded:


Aggregation and disaggregation principle

The Boards resumed their discussion on insurance contracts after the summer break with a number of Staff recommendations on the disclosure principles and guidance applicable to insurance contracts.

The first topic was the principle of meaningful aggregation and disaggregation included in paragraph 81 of the ED where it was stated that an insurer shall aggregate or disaggregate information so that information that is useful is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics.

The staff recommended that for the disclosures of insurance contracts:

  • The final standard should only include the aggregation and disaggregation principle of disclosures in paragraph 81 of the ED on the grounds that this would be consistent with other projects such as Revenue and Leases. However the Staff recommended that the final standard should not prohibit an insurer from aggregating amounts across reportable segments.
  • Finally they recommended that minimum disaggregation levels if necessary should be addressed for the individual disclosure requirements.


After a lively debate where the proposals were analysed in detail the Boards agreed with the Staff recommendations.

Methods, inputs and changes from previous periods

The Boards discussed the methods, inputs and changes from previous periods. As part of this discussion, the Staff recommended:


To retain the ED requirement that an insurer discloses separately the effect of each material change in inputs and methods, together with an explanation of the reason for the change, including the type of contracts affected.


To change the disclosure on discount rates in line with previous Boards' guidance and to require that for contracts in which the cash flows do not depend on the performance of specified assets an insurer would disclose the yield curve (or range of yield curves) used.


To remove the ED requirement to disclose a measurement uncertainty analysis for the inputs that have a material effect on the measurement of insurance contracts.

Proposals a) and b) were approved whilst c) caused a great deal of discussion which resulted in another divergent decision between the two Boards.

The IASB members decided that it would be better to align the IFRS on insurance to the requirements of IFRS 13 where the disclosures of measurement uncertainty have been developed. FASB members instead preferred to retain the proposals of the ED and they rejected the Staff recommendation.

Nature and extent of risk arising from insurance contracts

The Boards discussed the nature and extent of risk arising from insurance contracts. As part of this discussion, the Staff recommended:


to tighten the ED requirements in favour of a more consistent disclosure of liquidity risk such that the maturity analysis be based only on expected maturities (expected net undiscounted cash outflows resulting from recognised insurance liabilities). The option to disclose an analysis based on the remaining contractual maturities would be removed from the final IFRS;


to specify the minimum time bands for the maturity analysis in line with those of the leases project where, at the minimum, the table includes the expected net cash outflows for each of the first five years and a net total for the remaining and


not to require further prescriptive liquidity disclosures such as:


information on the ability of policyholders to request/demand their funds.


distribution of liquidity needs between different entities within the consolidated group.

Some IASB members commented that a broader guidance in line with the FASB decisions at their meeting on 7 September would be preferable given that liquidity risk is affected by the composition of the entire balance sheet and not only the expected maturity of certain liabilities.

The IASB eventually supported the Staff recommendations whilst the FASB preferred to extend its decisions on financial risk disclosures to issuers of insurance contracts. These decisions include two key requirements:

Risk adjustment: Objective and confidence level disclosure

Risk adjustment objective

The Staff recommended that the IFRS states that the objective of the risk adjustment should be "compensation the insurer requires for bearing the uncertainty inherent in the cash flows that arise as the insurer fulfils the insurance contract".

The IASB approved this recommendation.

The Staff also recommended that the application guidance on the risk adjustment objective should clarify that:


the risk adjustment measures the compensation the insurer would require to make it indifferent between


fulfilling the insurance contract liability, and


fulfilling an obligation to pay an amount equal to the expected present value of the cash flows that will arise from the insurance contract


in estimating the risk adjustment, the insurer should consider both favourable and unfavourable outcomes in a way that reflects its degree of aversion


a risk adverse insurer would place more weight on unfavourable outcomes than on favourable ones.

Some IASB members thought the than on favourable ones' language in recommendation c) above should be removed because of the ambiguity it carries. However the IASB agreed with all of the Staff proposals.

In addition the IASB decided to retain the confidence level equivalent disclosure that had been proposed in paragraph 90(b)(i) of the ED. Eleven IASB members supported this decision.

In reaching this decision that confirms the ED approach the IASB rejected the Staff alternative disclosure that for the key inputs the insurer used to determine the risk adjustment, the insurer should:


provide quantitative disclosure of the range of values within which those inputs would lie if these inputs had been determined from a market participant perspective; or


disclose that it believes those inputs do not differ from those of a market participant.

The basis for the rejection included a number of specific considerations all of which displayed a common discomfort of the IASB members to introduce disclosures that would have brought back into the new IFRS elements of the current exit value approach that had been abandoned in favour of the current fulfilment value model.

Risk adjustment: Techniques and inputs

Removal of the limitation of techniques

The Staff recommend eliminating the limitation of the permitted techniques for quantifying the risk adjustment and that an insurer should apply a valuation that simply meets the objective of the risk adjustment.

The desirable characteristics that a risk adjustment technique should satisfy in order to meet the notions that the Board intended to convey with the risk adjustment objective are: (a) risks with low frequency and high severity will result in higher risk adjustments than risks with high frequency and low severity, (b) for similar risks, contracts with a longer duration will result in higher risk adjustments than those of a shorter duration, (c) risks with a wide probability distribution will result in higher risk adjustments than those risks with a narrower distribution, (d) the less that is known about the current estimate and its trend, the higher the risk adjustment shall be and (e) to the extent that emerging experience reduces uncertainty, risk adjustments will decrease and vice versa.

IASB members approved the Staff recommendation and reaffirmed the characteristics as drafted in the ED. However some IASB members noted that these characteristics did not include anything in relation to the level of diversification of a portfolio, since a large correlation of the individual risks increases a portfolios risk, and vice versa.

Finally the IASB decided to retain as examples the three techniques mandated in the ED (Confidence levels, CTE and Cost of Capital), together with the related application guidance.

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