Insurance contracts

Date recorded:

This session included three papers: Presentation of Premiums and Claims/Benefits in the Statement of Comprehensive Income (2A), Presentation in Statement of Comprehensive Income for Non-Claims Fulfilment Costs (2B) and for Acquisition Costs (2C).

The IASB staff presented paper 2A and its recommendation to use an earned premium presentation, “whereby premiums are allocated to periods in proportion to the value of coverage that the insurer has provided in the period, and claims are presented when incurred”. On the other hand, the FASB staff proposes to use a premium due presentation, “whereby premiums are presented when due and an expense representing the claims, benefits and margins associated with these premiums is presented at the same time”.

The IASB opened the discussion and it quickly became clear that the majority favoured the IASB staff recommendation. Although some Board members acknowledged the complexity of the approach, they believed it was a step towards consistency with other industries, as well as being a good indicator of performance. Some IASB members expressed a preference for the summarised margin approach included in the 2010 Exposure Draft (“the ED”) and suggested to use it if no consensus was reached on the earned premium presentation.

For reasons similar to the IASB’s, the FASB agreed that a premium earned presentation would be preferable to the “premium due”, which is what the FASB staff was proposing. The FASB finds the premium earned to be more consistent with “revenue recognition” and a better proxy for volume of activity. A few FASB members also expressed a preference for the summarised margin approach, however, they accepted that it does not address the need for volume information that the industry wished to see.

Both Boards tentatively voted in favour of using the premium earned presentation (IASB: 13 in favour, FASB: 5 in favour). The Chairman of the FASB asked that the method for determining the revenue not be prescriptive.

The FASB staff presented Paper 2B which proposes that, in an earned premium presentation, a portion of the premium should be allocated to cover non-claims fulfilment costs (i.e., additional costs that an insurer expects to incur in fulfilling a portfolio of insurance contracts). The premium allocated to cover these costs is proposed to be included in insurance contract revenue in the periods in which the costs are expected to be released from the liability of remaining coverage, and the amounts presented as expenses should be the actual costs incurred or added to the liability for incurred claims in the period.

After a short discussion, the IASB tentatively voted in favour of this recommendation with 14 members agreeing with the staff proposal and the FASB tentatively agreed unanimously.

The majority of the IASB voted not to answer to the second question from Paper 2B which asked whether “any accompanying application guidance should acknowledge that in some circumstances, simpler procedures will produce results that are not materially different”. Some IASB members did not like the use of “materiality” and said it could lead to interpretational issues.

The IASB staff presented Paper 2C which deals with the presentation of acquisition costs. The paper recognised that the FASB and IASB had reached different conclusions and therefore, two different proposals were put forward. The IASB staff recommended that the cash flows relating to acquisition costs be presented in the statement of comprehensive income over the coverage period. It should be noted that the profit from the contracts does not change from what is determined under the building blocks approach and that this requirement is to decompose the building blocks approach liability to present revenue and expenses in the statement of comprehensive income.

The IASB tentatively approved the staff recommendation with 14 members voting for it.

The FASB proposed that acquisition costs be treated as part of the insurance liability and recognised as part of the margin and, either separately presented on the statement of financial position or included in the roll forward as part of the disclosures.

The FASB agreed that the acquisition costs should not be recognised as an asset and that they should be instead deducted from the single margin. Five members of the FASB were in favour of showing the insurance liability in two lines on the financial statement: one for the best estimate and one for the margin net of acquisition costs.

In conclusion, the Boards unanimously agreed with their staff proposals that the acquisition costs should be recognised in the statement of comprehensive income in a way that is consistent with the proposed allocation of the residual margin/single margin.

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