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Insurance contracts

Date recorded:

Insurance Contracts – Agenda Paper 2

The Board will consider feedback from investors and analysts on the new Insurance Contracts standard gathered from 35 discussions held since its publication (paper 2A). The meetings used a presentation to facilitate those discussions (paper 2B), showing worked examples of statements of financial performance and financial position, along with disclosures about the movements in insurance contract liabilities.

The staff report that the overall feedback is positive, welcoming greater transparency and comparability. Investors had specific questions about how the presentation of life and non-life insurance will be affected by the changes. There had also been questions on the capital solvency requirements and the ability to pay dividends.

Overall, the staff say that the investors appreciated the fact that revenue will follow the provision of service rather than cash flows and will exclude deposit components. The timing of revenue recognition will not depend on whether the business is life or non-life. There is support for onerous contracts to be recognised up-front but not the day-one profits. There is also support for separate presentation of insurance service result from insurance finance income or expense, and for discount rates to reflect the characteristics of the contracts issued, rather than the asset allocation of the issuer.

There are concerns about the entity specific judgements (discount rate, risk adjustment, CSM) and optional choices given around presentation of insurance finance income or expense and the method of transition, when it is not fully retrospective. Optional choices are seen as impacting comparability and principle-based approaches can create diversity of interpretation, but disclosures are welcomed as mitigating the possible effects.

Investors and analysts emphasised the need to consider the level of detail required and the level of aggregation used in disclosures. There is a need for comprehensive disclosures of changes in insurance contract liabilities. Further there is a need for full disclosures about how significant judgements are made and changes in those judgements, including the confidence level for risk adjustment for non-financial risk.

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