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Insurance contracts – Education session on residual margins

Date recorded:

The IASB met on the 15 November for an educational session on residual margin. During the two hour long meeting, the IASB staff presented the papers and asked the Board their views on certain questions without formally asking for decisions to be taken. Although the FASB staff joined by teleconference, it did not participate in the discussions as FASB prefers the route of a single composite margin.

The first paper, "Which changes in estimate adjust the residual margin?", discusses the changes in estimate that would adjust an unlocked residual margin, assuming that the tentative decision of unlocking the margin to reflect changes in cash flows still holds. The staff asked the IASB its views on whether all the changes in estimates used to measure the insurance contract liability should adjust the residual margin and if not, which changes should / should not.

After quite a lengthy discussion, there was a clear preference among the Board members for unlocking only non-financial estimates (i.e., any changes relating to the discount rate and the risk adjustment should not be taken through the residual margin (assuming the tentative decision to unlock remains)). It was however made clear to the staff that many questions still remain unanswered and that developing concrete examples would make the discussions much more productive.

The second paper, "Residual margin — two approaches", contrasts the approaches of locking in the residual margin at inception, as per the exposure draft, and the approach of adjusting the residual margin to reflect some or all changes in estimates. After summarising the paper, the staff asked the IASB what approach it favoured. Views were split; approximately half of those members who spoke up had a preference for unlocking the margin whereas the other half preferred to retain the approach from the exposure draft. We noted that similar arguments were raised to support both views; in particular, the degree of complexity was raised as a negative feature of the other approach by both camps. IASB staff appeared to provide support to the unlocking camp when they pointed out that locking the residual margin is not as simple as it may appear and that respondents to the exposure draft were indeed concerned about the practical implications of locking in the residual margin.

The other papers on allocation of residual margin and interest accretion were not discussed. Another session on insurance is taking place on 16 November and will address disaggregation of explicit account balances.

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