Insurance contract revenue

The Staff commented that items currently included in the top line of the statement of comprehensive income of insurance companies did not present a consistent measure of revenue. For short duration contracts these disclosures did not present any problems but for long duration contracts it depended on the jurisdiction. Premiums due or written do not recognise the service provided and sometimes included a material investment component, leading to a lack of consistency and comparability.

The feedback on the proposals in the 2013 ED was mixed. Standard setters, regulators and accounting bodies agreed with the proposals, whereas many others (mainly preparers and users of the financial statements of insurers issuing long term contracts) disagreed. Some of the commentators preferred the summarised margin approach proposed in the 2010 ED. Some prefer volume information, but there was no general agreement on what volume information should be disclosed. The Staff noted that the IASB had rejected presenting volume information in their deliberations for both the 2010 and the 2013 EDs, as this would reduce transparency, require the disclosure of claims, and did not enable meaningful comparisons to be made.

The Staff considered that the IASB should confirm its 2013 ED proposal, and made the following three recommendations:

1. An entity should be prohibited from presenting premium information in the statement of comprehensive income (SOCI) if that information is not consistent with commonly understood notions of revenue;
2. Entities should be required to present insurance contract revenue in the statement of comprehensive income, as proposed in paragraphs 56-59 and B88-B91 of the 2013ED; and
3. Entities should disclose the following:
   • a reconciliation that separately reconciles the opening and closing balance of the components of the insurance contract asset or liability (paragraph 76 of the 2013 ED);
   • a reconciliation from the premiums received in the period to the insurance contract revenue in the period (paragraph 79 of the 2013 ED);
   • the inputs used when determining the insurance contract revenue that is recognised in the period (paragraph 81(a) of the 2013 ED); and
   • the effect of the insurance contracts that are initially recognised in the period on the amounts that are recognised in the statement of financial position (paragraph 81(b) of the 2013 ED).

Recommendation 1 – Presentation of premium information in the SOCI

This first recommendation stimulated a lively debate. Many IASB Members commented on the presence of material deposit components in the premium receivable from long-term insurance contracts and debated the merit for and against the practice of presenting an amount in a prominent line of the Statement of Comprehensive Income (SOCI) which includes such deposits. They also contemplated the merits of a prohibition to be introduced in IFRS for a particular type of presentation in the SOCI (i.e. premium with significant deposit components presented as revenue) and the implications of the fact that insurance contracts are currently scoped out of the IFRS on revenue from contracts with customers. The debate concluded with an assessment of the Staff recommendation against the general presentation principles in IAS 1 and its application within the wider financial services industry (e.g. banks and asset managers).

When called to vote by the Chairman, 13 Board members agreed with the Staff’s recommendation, while 3 disagreed.

Recommendation 2 – Presentation of insurance contract revenue in the SOCI

The Staff noted that some of the commentators considered that the presentation of insurance contract revenue without an investment component was complex. However, the Staff considered that the proposals had been misunderstood. Although some additional costs would be incurred, the disclosure of insurance contract revenue would be of great benefit for users, the biggest of which was comparability with other industries. The Staff stated that the feedback from the comment letters indicated that the extent to which the new information would be used in the future is not known, but they considered that there would be benefits in having comparable revenue information across different types of insurance contracts and with other contracts with customers. One Board member disagreed with this assessment because it would be difficult and expensive to separate the deposit component thus failing the cost/benefit test. He felt that the summarised margin approach may be a preferable alternative.

The issue around the separation of deposit components attracted further debate, which highlighted the need to treat them consistently between premium and benefits/claims so that both revenue and expenses were consistently presented in the SOCI. A number of IASB Members questioned the approach to achieve consistency of presentation and whether the Staff proposal was departing from a principle-based approach. Ultimately, the IASB Members were satisfied that the novelty of these requirements demanded a higher degree of prescription in the new IFRS, and when called to vote by the Chairman, 15 Board members agreed with the Staff’s recommendation, while 1 disagreed.

Recommendation 3 – Disclosure requirements

The Staff stated that the first two disclosure requirements provided a reconciliation of revenue to cash inflows and disclosed the drivers of revenue, e.g. the margin and expenses. The other proposed disclosures provided additional information about the underwriting activity (which had been requested during the outreach activities) and the expected cash inflows and acquisition costs of insurance contracts that were initially recognised in the period. The set of proposed disclosure requirements was very similar to that which would be required under the summarised margin approach, and would identify the impact of unlocking the CSM.

This final instalment of the debate featured new queries around the usefulness of premiums due as a useful KPI of an insurer’s activity (but not revenue) and why premiums due were not required to be disclosed. The Staff responded that this would require premium due to be defined, and such a disclosure would add to the cost of implementing it.

When called to vote by the Chairman, 15 Board members agreed with the Staff’s recommendation, while 1 disagreed.

Project plan for the non-targeted issues

The Staff summarised the seven issues that they were, and nine issues they were not, recommending for further discussion at future IASB meetings. Of the former group, the Staff considered that the unit of account, the discount rate for long-term contracts and the asymmetrical treatment of reinsurance contracts would require the greatest analysis. They considered that the other issues (fixed-fee service contracts, significant insurance risk guidance, recognition of contracts acquired through portfolio transfer or business combination, and the allocation pattern for the CSM) were straightforward.

A debate followed where IASB Members suggested additional items to be reopened or introduced for the first time in the redeliberation process over the coming months. One Member asked whether it might be better to include all contracts with participating features within the financial instruments standard. The Staff responded that the standard for insurance contracts was a better fit for dealing with contracts with discretionary features, and that a majority of those who had responded to the 2013 ED supported including such contracts in the insurance contracts project.

There were concerns flagged about requiring the disclosure of the confidence level given the feedback from the actuarial profession as to its impossible calculation, lack of comparability and operational complexity. The Staff responded by noting that similar comments had been presented to the IASB before the 2013 ED had been issued and the IASB concluded that this disclosure was required.

Finally, the possibility to reassess the nature of the CSM as a component of the insurance liability was considered in light of its role to present the unearned profit of insurance portfolios, its comparison with embedded value highlighted in some field testing results and its relevance at the transition date to the new IFRS.

None of these topics were approved for inclusion in the work plan for the rest of the year.

From the list of topics excluded from future discussion the Staff observed that the concerns raised by a few respondents over the risk of inconsistent application of the proposed principles to determine top-down and a bottom-up discount rates could not be addressed without abandoning the principle-based approach that informs all IFRSs.

When called to vote by the Chairman, 14 Board members agreed with the Staff’s recommendation, while 2 disagreed.

In conclusion, the overall plan for future IASB meetings includes the tasks of (1) addressing the issues not targeted in the 2013 ED that the IASB has tentatively decided to address, (2) considering the application of the model for non-participating contracts to contracts with participating features, including assessing any modifications that may be needed to reflect these features, and (3) considering the transition requirements in the context of a near final model.