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Insurance contracts

Date recorded:

The session was extensive and it began an hour earlier than scheduled and ended one hour later.

The Boards considered a verbal summary of the investors' outreach that took place during the last few months. The Staff summarised it saying that there were two broad themes emerging from the outreach. Based on their understanding investors wanted to see:

  • More evidence of the Boards' intention to listen to their views and concerns. However the Staff also noted they received conflicting views and requests from investors; and
  • An accounting standard that reports economic volatility, volume information and provides them with insights into the effects of measurement judgements as well as when these judgements are changed, in particular when dependent on changes in interest rates.

Scope - Fixed fee service contracts

The FASB Staff led the discussion on this item reminding the Boards that last March they tentatively agreed to exclude certain types of fixed fee contracts from the definition of insurance.

Staff recommended that fixed fee contracts that provide service as the primary purpose should be excluded from the scope of the insurance contract standard if they exhibit all of the following characteristics:

The discussion considered specific arrangements to be in the grey area including windscreen replacement, roadside repair, warranty and health as the Boards worked to ensure they understood where specific contracts would fall out of scope.

Overall, there was broad support from the Boards despite some open questions on certain contracts such as warranty or health related contracts. The Staff recommendation was unanimously approved by both Boards, subject to redrafting certain language and inclusion of application guidance or examples.

Presentation - Statement of comprehensive income (SoCI)

The Staff reminded the Boards that in the June meeting, there were presentation alternatives for which the Boards expressed interest in more information. The Staff outlined with illustrative examples the alternatives to the recommended presentation highlighting what information would be required to be on the face and in the notes and how the recommendation applies to the Building Blocks Approach (BBA) and the Premium Allocation Approach (PAA). The Staff noted that they concluded that a separate presentation of BBA and PAA items is useful.

The Staff asked whether the Boards agree that the insurer should disclose:

In addition, the Staff asked with which of the recommendations below the Boards agree with and which line items should be presented as a minimum on the face of the SoCI.

The recommendations were:

  • Recommendation A - Disclose the underwriting margin either in total or segregated between the BBA and the PAA contracts with a requirement to present premium earned income and claims expenses for the PAA contracts and a requirement to present premiums due for the contracts under the BBA; or
  • Recommendation B - Mandate only the BBA underwriting margin in the SoCI leaving the PAA and the BBA premiums due items as required disclosure notes with an option to include them on the face of the SoCI as an accounting policy election. 
    The Staff noted that volume information under Recommendation A is on the face whilst Recommendation B would allow for that information to be in the disclosure notes and it would result in an approach that would produce a similar SoCI for pure insurers as well as conglomerates with insurance operations. Recommendation A would always operate under the usual materiality principle.
  • Recommendation C (suggested in an addendum by one of the IASB members) — Combine BBA and PAA in separate columns that refer to the underlying business models (i.e. life and non-life for lack of better definition at this point) with only two items mandated on face: the sum of premium earned and premium due, the latter adjusted for the changes in the BBA liability, and the underwriting margin line. The proponent IASB member noted that this approach makes information more comparable outside the insurance sector.
The Staff noted that they felt Recommendation C was complex, that changes in the liability also contain the impact of claims and benefits and that the premium figure for the BBA portion of that line item would be a derived number rather than a real premium amount.
The IASB member proposing Recommendation C illustrated with examples why he did not believe that figure should be deemed a derived amount and that he could see its relevance to investors.

A lively albeit inconclusive debate followed where we noted in particular that the Boards only agreed that the recommendations could be seen in a different light if there was a more extensive unbundling of deposit components.

All acknowledged that users wish to see volume information (e.g. premiums) and the underwriting margin. It was also noted that insurers could be required to only apply the IAS 1principles to address the need to include particular items on the face of the SoCI. With these considerations, that do not appear to represent tentative decisions, the Boards asked the Staff to bring back this matter using examples that explore Recommendation C and that illustrate the differing entity types.

The Boards did not address the remaining questions from the Staff paper.

Presentation - Statement of financial position (SoFP)

The Staff asked whether, for the BBA contracts, the Boards agree that insurers should disaggregate the following components, either in the SoFP or in the notes (in this case the amounts must reconcile to the SoFP):

The Boards unanimously agreed with this recommendation. However, in response to a proposal from one of the FASB members to consider whether acquisition costs could also be separately presented in the SoFP as an asset they agreed to have the Staff pursue this further at a future meeting.

The Staff then asked whether, for those contracts measured under the PAA, the Boards would agree that the liability for unexpired coverage (i.e. that based on the unearned premium method) should be disclosed separately from the liability for incurred claims (always based on the BBA).

The Boards agreed with this recommendation unanimously.

The Boards then decided that for the PAA an insurer would recognise as a receivable any uncollected premium due to secure the short duration coverage irrespective of the fact that the policyholder has a right to cancel the policy and forfeit the payment of those premiums not yet due. The receivable would be an asset outside the scope of the insurance contracts standard. The vote was unanimous from FASB and majority-based from the IASB (9 against 6).

The Staff had proposed that only the unconditional right to receive a premium is accounted for as an asset with the conditional premiums deducted from the unearned premium liability. The Boards overruled them on the grounds that this would be a departure from the existing practice that seems to have support from many users.

It should be noted that with this decision an insurer would account for the unearned premium liability based on the way the policyholder agrees to pay the premium (i.e. all upfront or by instalments over the coverage period). In the event of a significant conditional premium payment the accounting of the receivable under the financial instruments standard would recognise a lower asset than in the event of an upfront payment. This is due to the initial fair valuation of the asset which would take into account the probability of certain cash flows not being collected. As a result the unearned premium liability would also be lower to reflect the fact that it may expire earlier following the cancellation of the "stand ready" obligation that a non-payment of a future premium would trigger.

The majority of the Boards then approved the Staff recommendation that the PAA liability would be presented separately from the BBA liabilities. This required two IASB votes because they initially perceived this as implicitly requiring a vote for a two-model approach which they reject. However when the IASB Staff reassured the IASB that this was not the case and 10 IASB members approved the proposal with only 5 still voting against it.

One last item on the SoFP discussion was the agreement to account for portfolios that under the BBA may be assets separately from portfolios that are liabilities. On the grounds that there will be a future debate on the presentation of acquisition costs deemed part of the contractual cash flows the FASB unanimously supported the proposal with 13 IASB members voting in favour and only 2 against it.

Eligibility criteria for the PAA

The last item for discussion at this meeting was a matter that the Staff brought back after having been unsuccessfully discussed at two previous joint meetings with July being the most recent instance of this ongoing stalemate. Unfortunately also this third attempt was fruitless and the Staff will be preparing a new attempt in the coming months.

Parallel to this discussion and increasing its overall importance in the Boards' efforts to converge is the underlying disagreement between the Boards on an accounting standard for insurance contracts that uses a single or two measurement models or, in other words, whether the PAA is a simplification of the BBA or an accounting model on its own.

IASB strongly believes that there should be a single model with a simplification allowed when the PAA delivers materially the same results as the BBA. FASB instead believes that a separate model based on the PAA should be codified in the final standard.

At this meeting the Staff suggested to consider the PAA as the measurement for any type of insurance contract and develop criteria for when an insurer would not be permitted to use it. This new approach, which was further refined with an addendum paper released the night before the joint meeting, would require an insurer to use the BBA when either of the following applies:

For both criteria the Staff had also produced application guidance which triggered a lively but ultimately inconclusive debate around its outcomes.

The Boards gave general support for what the Staff was trying to achieve but concern over the application guidance being ambiguous and resulting in the accounting of contracts under the PAA that both Boards would instead expect to be measured with the BBA ended in a request to redraft the guidance that supports these criteria. The Boards also asked for examples of contracts that are in the PAA or in the BBA based on these future revised criteria.

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