Insurance Contracts – Phase II

Date recorded:

As a part of phase II of the Insurance Contracts project, the Board discussed staff papers dealing with issues on Cancellation and Renewal options.

The first question raised was related to potential differences on short-term versus long-term contracts. The staff's perception was that there should be no inherent difference in contracts as long as the terminology in the contracts is the same. Some Board members disagreed with this statement. They pointed out that acquisition costs may be different for short-term than for long-term contracts. Other comments were that there could be different intentions behind a short-term contract with a renewal option and a straight long-term contract. The Board seemed to agree that institutional as well as contractual arrangements have to be considered when assessing the accounting treatment.

The staff also raised a question on whether only substantive features should raise different treatments of contracts. The Board had a short discussion on whether price would be the only substantial difference in a contract, and agreed that it probably would not be. They agreed to come back to this issue.

The next staff paper raised the issue on whether an asset could be recognised based on cash flows from policyholders. A Board member noted that the analysis made by the staff that an asset should not be recognised seemed reasonable, but not for the reason addressed, that the insurer does not control the cash flows. The Board member stated that the question should be whether the insurer has a present right to these cash flows.

The other issue dealt with was whether this conclusion would apply even if cash flows expected are specified in the contract. In conjunction with this issue, the Board discussed briefly, the meaning of the word specified. Some Board members commented that the policyholders have no obligation to pay the premium even if an amount is specified in the contracts and it would therefore not change the fact that this would not create an asset for the insurer.

The Board also discussed the rights and obligations in an insurance contract. The Board was asked whether rights have to be enforceable. Board members tended to agree that enforceability is crucial. An additional issue discussed was whether an insurer could acquire contractual rights from an insurance relationship. The staff pointed out that if the policyholder did not pay premiums, the insurer is able to let the contract go without any obligations. The question is how strong the remedy has to be before you can say it is enforceable and giving contractual rights to the insurer. The Board agreed that this would need further deliberation.

The Board did not discuss agenda papers 3E and 3F.

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