This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Insurance contracts

Date recorded:

The focus of this meeting was for the IASB to discuss various Staff recommendations for the insurance contracts project, specifically (1) unlocking of the contractual service margin (CSM) and (2) recognising changes in the discount rate in other comprehensive income (OCI). The Staff noted that participating contracts would not be discussed at this meeting and would be addressed at a future meeting.

Unlocking of the CSM (Agenda Papers 2A, 2B, 2C)

The Staff reminded the Board that the 2013 IASB exposure draft (ED) stated that the measurement of an insurance contract includes determining the CSM, which is measured at inception as the difference between the present value of the expected future cash outflows plus a risk adjustment and the present value of expected premiums. The Staff then discussed three proposed recommendations to the IASB Board members related to unlocking the CSM.

In Agenda Paper 2A, the Staff recommended that the IASB should confirm the proposals in the IASB ED that after inception:

  1. differences between the current and previous estimates of the present value of cash flows related to future coverage and other future services should be added to or deducted from the CSM, subject to the condition that the CSM should not be negative; and
  2. differences between the current and previous estimates of the present value of cash flows that do not relate to future coverage and other future services should be recognised immediately in profit or loss.

One Board member agreed with the Staff recommendation, noting the objective is to achieve faithful representation of the unearned profit and he believed that this principle is clear in the proposal.

Another Board member noted that unlocking the CSM is consistent with revenue recognition principles; however, this Board member questioned the Staff about the measurement of the CSM and the discount rate that should be applied. The Staff noted they intend to bring this issue back to the Board within the next few months.

Another Board member asked how the principles of unlocking the CSM and unit of account align. This Board member believes there needs to be a principle for this area.

When called to vote by the Chairman, the Board agreed with the Staff’s recommendation.

In Agenda Paper 2B, the Staff recommended that favourable changes in estimates that arise after losses were previously recognised in profit or loss should be recognised in profit or loss to the extent that they reverse prior accounted losses that related to future services or coverage at the time of the reversal.

Several Board members agreed with the Staff’s recommendation, but also asked for further clarification or more explicit language in the final standard.

As part of this discussion, the Staff emphasised that when an entity tracks and calculates the margin, it would need to determine if losses still relate to future coverage or services.

When called to vote by the Chairman, the Board agreed with the Staff’s recommendation.

In Agenda Paper 2C, the Staff recommended that an entity should also adjust the CSM for differences between current and previous estimates of the risk adjustment that relate to coverage and other services for future periods, subject to the condition that the CSM should not be negative. Changes in the risk adjustment that relate to the coverage and other services provided in the current and past periods would continue to be recognised in profit or loss.

The Board members generally agreed with the Staff recommendation. Several members questioned whether a decision to unlock the CSM for changes in the risk adjustment related to future coverage and services should trigger reconsideration of using a single margin approach for measurement, or discussion of possibly permitting entities to use a single margin as a practical expedient for certain types of contracts. The Staff reiterated its belief that a two margin approach provided better information to financial statement users, particularly for long-tail contracts under the premium allocation approach, or when contracts are potentially onerous. It also observed that providing a practical expedient would create additional complexity and potentially provide only limited benefit.

Another Board member questioned whether the risk adjustment would be affected by changes in the discount rate and create an inconsistency with the principle that the CSM should not be unlocked for changes in the discount rate. The Staff acknowledged that the risk adjustment is a current measurement that would be affected by changes in discount rate and noted its intention to discuss this topic with the Board at a future meeting.

One Board member raised the issue of whether entities use different units of account to determine the CSM and the risk adjustment and observed that the Board’s decision could force entities that compute the risk adjustment at the entity level to make some type of portfolio-level allocation to apply the unlocking mechanism. Another Board member expressed the belief that although entities may consider entity-wide benefits when determining the risk adjustment, the calculation is ultimately performed at the portfolio level. The Staff supported this view and indicated that during field testing entities determined the risk adjustment at the portfolio level.

When called to vote by the Chairman, the Board agreed with the Staff’s recommendation.

Presentation of the effect of changes in discount rate in OCI (Agenda Papers 2D, 2E and 2F)

The Staff reminded the Board that a majority of those providing feedback indicated that the use of OCI to present the effect of changes in discount rates should not be mandatory. Accordingly, the Staff made three recommendations to the Board.

In Agenda Paper 2D, the Staff recommended that the Board confirm the use of OCI to record changes in discount rates as proposed in the 2013 IASB ED, subject to developing:

  1. an option that would permit entities to present the effect of such changes in profit or loss; and
  2. disclosures that provide information about the effect of changes in discount rate during the period.

Three Board members supported dropping the use of OCI altogether. Other Board members supported the use of OCI and expressed tentative support for providing entities with an option, but wanted to understand the conditions for its use before committing themselves to a final position. Two Board members were in favour of making the option irrevocable.

One Board member that opposed the use of OCI indicated that if the OCI approach was retained, the Staff should further explore using a book yield method similar to that proposed by the insurance industry for participating contracts for determining the amount to be recorded in OCI for non-participating contracts.  

The Chairman asked the Board if they are willing to have the Staff explore an option and when called to vote, 13 Board members agreed with the Staff’s recommendation, while 3 disagreed.

In Agenda Paper 2E, the Staff recommended that an entity should choose to present the effect of changes in discount rates in profit or loss or in OCI as its accounting policy and apply that accounting policy to all contracts within a portfolio.

Many on the Board believed there is a need to provide entities with an option to record the effect of changes in discount rates in either OCI or through profit or loss to help entities address potential accounting mismatches. A minority of these members believed that the option should be irrevocable. More Board members seemed concerned that making the option irrevocable would not provide entities with sufficient flexibility to address accounting mismatches that emerge in the future, or to modify their asset/liability management strategies to respond to changing economic conditions. They believed that making the option an accounting policy choice provides this flexibility.

Some Board members questioned how certain aspects of the guidance for accounting policy changes in IAS 8 would be applied in the context of the option, notably (1) retrospective application of accounting policy changes (2) the requirement to apply accounting policies consistently to similar transactions and (3) the requirement that an accounting policy change must provide reliable and more relevant information about the effects of transactions.

There also was significant discussion about whether the portfolio level was the appropriate unit of account. Some Board members believed that permitting an accounting policy election at the portfolio level would not impose sufficient discipline on an entity’s use of the option and would impair the transparency, comparability and comprehensibility of the entity’s financial reporting. Other Board members noted that the portfolio level seems to be an appropriate unit of account for the policy election; however, they encouraged the Staff to explore whether there is another level between an individual contract and the entire entity, other than a portfolio, that may also be appropriate, such as a group of portfolios or a segment. Another Board member believed that it would be preferable for the accounting policy election to be applied at the entity level. Throughout this discussion questions were raised about the interaction of the unit of account with application of the IAS 8 accounting policy change requirements.

The Staff acknowledged concerns that portfolio may be defined at too granular a level and indicated that reconsideration of the broader definition of portfolio used in the 2010 IASB ED may be warranted. A Board member commented that changing the definition may help for this area; however, doing so will create problems with the onerous contract test.

The Chairman asked the Board if they would like the Staff to research a solution that would (1) not establish the unit of account at too granular a level and (2) would impose more discipline for accounting policy changes. When called to vote by the Chairman, 13 Board members agreed with the Staff’s recommendation, while 3 disagreed.

In Agenda Paper 2F the Staff proposed disclosures on the effect of changes in discount rate. The Staff recommended that entities disclose the following information:

  1. For all portfolios of insurance contracts: Disclose an analysis of total interest expense included in total comprehensive income disaggregated at a minimum into:
    1. the amount of interest accretion determined using current discount rates,
    2. the effect on the measurement of the insurance contract of changes in discount rates in the period, and
    3. the difference between the present value of changes in expected cash flows that adjust the CSM in a reporting period, measured using discount rates that applied on initial recognition of insurance contracts, and when measured at current rates.
  2. In addition, for portfolios of insurance contracts for which the effect of changes in discount rates are presented in OCI: Disclose an analysis of total interest expense included in total comprehensive income disaggregated at a minimum into:
    1. interest accretion at the discount rate that applied at initial recognition of insurance contracts reported in profit or loss for the period; and
    2. the movement in OCI for the period.

One Board member noted that certain of the proposed disclosure are nice to have and would appeal to analysts but are not necessary. He questioned why these disclosures were not included in the 2013 IASB ED and why they are considered necessary at this time. The Staff noted that the recommended disclosures arose from their analysis of the interest expense and expressed their belief that the disclosures would provide meaningful information to financial statement users.

Another Board member commented that the disclosures may need to be updated to reflect the Board’s tentative decision that an entity’s treatment of the effects of changes in in the discount rate should be an accounting policy election.

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

Next steps

At the April meeting, the Staff intend to ask the IASB to consider (1) the main issues relating to insurance contracts revenue and (2) other issues raised in the responses to the 2013 ED related to matters on which the IASB did not specifically ask for input. Issues specific to participating contracts will be considered at later meetings, and at that time, the Staff will consider whether to recommend that the Board revisit tentative decisions reached for non-participating contracts.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.