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Insurance Contracts

Date recorded:

The Board considered the following aspects of non-life insurance accounting:

  • (a) whether the measurement of non-insurance claims liabilities should include discounting and risk margins.
  • (b) four possible accounting approaches for non-life insurance contracts, which discussed in January 2005 with the Insurance Working Group.

There was a brief digression when Board members expressed extreme disappointment at receiving a letter from several insurance industry associations that challenged the activities of the Insurance Working Group. The Board expressed its absolute support for the Working Group and appreciation for the way it has engaged the Board and the staff in studying complex problems. However, it was apparent that the insurance associations had not understood the Working Group's terms of reference, which did not include making recommendations to the Board. It was agreed that the Board should clarify matters with the industry associations as soon as possible.


The IASB staff reviewed recent developments on the Insurance project, noting that the FASB had expressed the desire that this become a 'modified joint project' at the appropriate time (i.e., after the IASB has published a discussion paper). The staff noted that the topics for discussion at the meeting reflected the following advice from participants in the Insurance Working Group.

  • (a) it is important to consider not only individual measurement topics but also the whole package of decisions that make up entire accounting approaches.
  • (b) there is concern about the possibility of accounting mismatches between insurance liabilities and the assets that back them.

The Board agreed that it should not discuss whether there should be a single model until the Working Group has had the opportunity to discuss several basic types of insurance contract (annual non-participating non-life, non-participating life, participating life, unit-linked (variable) life or annuity, universal life). In addition, there was a need to look again at the measurement attributes before committing to a particular course of action. One Board member noted that he would not support any solution that produced a different accounting model for each type of insurance contract depending on how it was described. There might be arguments for a different approach as between life and non-life, but other 'bells and whistles' could be accommodated through existing accounting standards on bifurcation, derivative accounting, etc.

Non-life business: over-view of possible accounting approaches

The Board discussed four possible approaches to accounting for non-life contracts, labelled A-D, as follows:

Approach A:

  • (a) uses the main features of most countries' existing accounting requirements for insurance liabilities (that is, unearned premium liability [amortised as the premium is earned, and subject to a liability adequacy test], deferred acquisition costs [amortised and subject to an impairment test], undiscounted claims liabilities with no explicit risk margin).
  • (b) applies IAS 39 Financial Instruments: Recognition and Measurement to financial assets.

Approach A is essentially the existing position for many insurers subject to IAS 39, local equivalents of IAS 39 or US GAAP.

Approach B:

  • (a) uses the main features of most countries' existing accounting requirements for insurance liabilities (same as approach A).
  • (b) modifies approach A's treatment of some financial assets held. Specifically, it permits amortised cost measurement for financial assets that provide fixed or determinable payments and are held to back insurance liabilities.

Approach C:

  • (a) distinguishes the stand-ready obligation to pay valid claims for future insured events arising under existing contracts from the claims liability (that is, the liability to pay valid claims for insured events that have already occurred, including claims incurred but not reported [IBNR]). The stand-ready obligation is measured (as in approaches A and B) as the unearned portion of the premium, less deferred acquisition costs (a future meeting should discuss whether deferred acquisition costs should be recognised separately from unearned premium).
  • (b) modifies approach A's treatment of the claims liability. Specifically, claims liabilities:
    • (i) are discounted. The Working Group has not yet discussed explicitly what discount rate should be used in an approach of this kind. To provide a specific proposal, this paper assumes a current risk-free discount rate. The use of a current discount rate seems consistent with Working Group participants' wish to minimise accounting mismatches.
    • (ii) include a risk margin (basis to be determined).
  • (c) applies IAS 39 to financial assets (same as approach A).
  • Approach C's treatment of claims liabilities would be consistent with the treatment of provisions in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Approach D:

  • (a) accounts for insurance liabilities (both claims liabilities and pre-claims liabilities) using the approach that the IASB and FASB are exploring in their joint project on revenue recognition. In some respects, this approach is also similar to the proposals in the Draft Statement of Principles developed by the former IASC Steering Committee. Specifically, 'unearned' premium and acquisition costs would not be deferred. Instead, the insurer's contractual rights and obligations would be measured at current exit value from inception.
  • (b) applies IAS 39 Financial Instruments: Recognition and Measurement to financial assets (same as approach A).

It was noted that the 'exclusive' labels were not necessarily useful, and that there was some overlap, especially between Approaches C and D. It was noted that Approach C is similar to the approaches adopted in Australia, Canada and New Zealand. Approach C could also be described as 'no change for premium accounting; FAS 60 with discounting for claims.' Approach D is generally a new approach.

The Board discussed the alternatives proposed by the staff at some length. The decision on preference was deferred pending the discussion of discounting and risk and uncertainty.


The Staff reviewed arguments in favour and opposed to discounting insurance liabilities (see Observer Notes, Agenda Paper 4A for these arguments). The Board had a wide-ranging discussion, but eventually agreed that discounting should be required for all non-life claims liabilities. There should there be no specific exemption on materiality grounds for liabilities that meet specified criteria. Normal materiality criteria should apply.

Risk and uncertainty

The Board discussed how risk and uncertainty should be reflected in the accounting model. The staff noted that this area had been particularly difficult for the Working Group to resolve. After a vigorous debate, the Board agreed that:

  • the measurement of non-life insurance claims liabilities should include risk margins. This recommendation is compatible with approaches C and D, as described above.
  • if approach D were to be adopted, risk margins would be included in both:
    • (a) the claims liability (i.e. the liability to pay valid claims for insured events that have already occurred, including claims incurred but not reported [IBNR]); and
    • (b) the stand-ready obligation to pay valid claims for future insured events arising under existing contracts, in other words obligations relating to the unexpired portion of risk coverage. (For discussion with the Insurance Working Group, the staff invented the term pre-claim liability to describe this.)
  • Risk margins should be applied in carrying out a liability adequacy test.

The Board noted that 'risk margin' was a term of art and expressed some dissatisfaction with it.

Estimation techniques

The Board agreed that it should clarify the measurement objective (in due course) and give high level guidance, but should not give detailed operational guidance on techniques for estimating the number and amount of claims arising under insurance contracts.

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