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We support a comprehensive standard on insurance contracts

  • Deloitte Comment Letter Image

Oct 27, 2013

We have published our comment letter on the IASB exposure draft ED/2013/7, "Insurance Contracts." We remain fully supportive of the objectives that the Board is attempting to fulfill in this phase of the insurance contract project and believe a comprehensive standard on accounting for insurance contracts will be of great benefit to investors and will improve financial reporting given the lack of an IFRS in this area. While we encourage the IASB and FASB to focus on differences in their views during redeliberations of their respective exposure drafts on this topic, we recommend that this should not detract from the IASB's objective of finalizing a standard in the near term. We also have a number of concerns about specific aspects of the proposals.

Points made in the comment letter include:

  • We are generally supportive of the boards’ approach to unlocking of the Contractual Service Margin (CSM), the presentational split of interest expense from insurance contracts between profit or loss and other comprehensive income (the “OCI solution”) and the new transition provisions. However, we believe that the proposals around the unlocking of the CSM requires substantial improvements to allow for the faithful representation of the impact that insurance and participating contracts will have on insurers’ performance. We also believe an entity should be able to make an irrevocable election at initial recognition of insurance contracts to recognize the change in carrying value associated with changes in discount rates to profit or loss.
  • Although we are supportive of the objective of reducing accounting mismatches, we are not supportive of the proposed “mirroring approach” for participating contracts because of its complexity, cost, and departure from the pricing and product design that insurers apply and that should be represented faithfully in their financial statements.
  • We believe that the proposed measure of insurance revenue is not the most relevant amount for presenting long-coverage insurance contracts’ contribution to an insurer’s performance because it is not consistent with the measurement of insurance portfolios, we are not aware it is the metric sought by investors and it is not used by key management personnel for assessing performance and allocating resources of an insurer.
  • We recommend the Board consider the timing of any new IFRS for insurance contracts noting the delays in finalizing IFRS 9 Financial Instruments as different effective dates for these standards would unduly penalize those entities for which the parallel adoption of both standards is the only reasonable transition strategy.

We also express a note of caution regarding the practical implications surrounding adoption of any new standard on insurance:

Given the diverse approaches currently used in measuring insurance contracts and the complexity of the contracts it addresses, the new IFRS for insurance will present a challenge for preparers, auditors and regulators and we expect there will be a high volume of interpretation issues in advance of the effective date. We would urge the IASB to address interpretations issues quickly and in advance of the effective date to maximize consistent application. The IASB may wish to consider continuing its outreach efforts with preparers and other stakeholders beyond the finalization of the standard up to the effective date so that issues are captured quickly and addressed by the IFRS Interpretations Committee expeditiously.

Click for access to the full comment letter.

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