Insurance Contracts Phase II

Date recorded:

The Board discussed various recognition and measurement issues related to insurance contracts the staff will use to develop the project further. The issues were as follows:


Should the accounting model be based on direct measurements of contract assets and liabilities, on deferral and matching of contract revenues and expenses, or some combination of the two?

Most Board members believed that the asset and liability approach, or more basically recognition of the rights and obligations under the contracts, should be the approach adopted. They noted that it could also be seen as a matching and deferral approach based on, amongst other things, risk factors or exposure. There was a concern expressed that the matching and deferral approach had not been fully explored, but this was not supported. The Board voted unanimously to pursue an asset and liability approach.


Should an asset-and-liability model use measurements based on fair value, entity-specific value, or some combination of measurement attributes?

The staff proposed that both initial and subsequent measurement should be based on fair value based on market observations and data. Where there was no market data the fair value should be determined based on the entity's data and observations. It was noted that there was an expectation that the fair value would not differ from an entity specific value. The staff proposal was accepted by vote of 12-2.


Should the measurement of some or all amounts recognised in the balance sheet be based on their present values?

This was not discussed as it would fall away because of the earlier decision about measurement at fair value.

Asset/Liability interaction

Should the measurement model incorporate expectations about asset performance in determining the carrying amount of the contract liability?

The staff view was that there should not be an interaction between asset and liability measurement. The Board believed that an interaction approach was inconsistent with a fair value approach and consequently supported the staff's views by vote of 14-0.

Risk/Service adjustment

How should the accounting model approach the question of risk (or service) adjustment?

The Board believed that a fair value approach would include these adjustments, although there was a concern among some Board members that these would be subjective and could have a significant effect on valuation and consequently net income. The Board concluded to include this adjustment within fair valuation by vote of 13-1.

Gain or loss on initial measurement/liability recognition

Should the accounting model be constructed in a manner that prohibits or significantly limits the recognition of net profit or loss on initial recognition?

This was not discussed at it was dealt with as a result of previous decisions.

Policyholder behaviour

Should the accounting model incorporate expectations about cash inflows and outflows that are a consequence of policyholder renewals or cancellations of an insurance contract?

The staff proposed that these fair value should take into account any non-cancellable, renewable, and extendable rights that restrict the issuer's rights to re-price whilst premiums are paid. A number of Board members believed that these valuation adjustments should be taken into account where they place constarints on the issuer and provide value to the customer such that further business will flow. They acknowledged that this needs to be restrictively worded. A Board member disagreed, stating that these features should be treated separately as a series of in-the-money options. The Board agreed (by vote of 11-2-1) that the staff should proceed to explore the approach of adjusting the fair value for these features in limited circumstances.

Acquisition costs

Should the accounting model require costs incurred to acquire new insurance contracts to be capitalised as assets and amortised?

The staff proposed that these costs should be expensed as incurred. Some Board members believed that these would be intangible assets but that they would not be initially measured at the cost of the costs. The Board concluded that these costs would be subsumed within the measurement of the liability and should, therefore, not be shown separately as assets. Consequently, they should be expensed. The vote was 9-4-1.


Should the measurement model unbundle the individual elements of an insurance contract and measure them individually?

This was deferred to a later meeting.

Participating contracts

How should the insurer's liability to holders of participating contracts be recognised and measured?

This was deferred to a later meeting.

Credit standing

Should the measurement include the effects of the entity's credit standing?

The staff believed that this would be reflected in the fair value of the liability, because the terms of the contract - including are any regulatory or other specific guarantees - would affect the valuation. It was noted that this would require an assessment of the effectiveness of the guarantees. The Board agreed by vote of 13-1.

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