Insurance Contracts – Phase II

Date recorded:

The IASB continued its discussion of various aspects of accounting for insurance contracts, the output of which will be a Preliminary Views Discussion Paper.

Timetable for Discussion Paper

The staff presented the latest project timetable and expected contents of the Discussion Paper. The staff expects that a Discussion Paper will be published in December 2006.

Board members expressed concerns about scheduling meetings with industry representatives during the same meeting week that the Board was scheduled to discuss many of the issues those constituents are likely to discuss with the Board. The staff agreed to consider how this schedule might be changed.

Board members expressed concern with including 'a summary of proposals by some insurance trade associations' as an appendix to the Discussion Paper. The staff clarified that the appendix would list where the proposals could be found (for instance, the URL for each proposal) rather than attempt to provide an overview or digest of those proposals.

It was noted that disclosure would not be addressed, as the staff think it premature to do so at this stage of the project. However, the staff noted that there was no intention to alter fundamentally the disclosure principles in IFRS 4.

It was also noted that the FASB would do something with the Discussion Paper, but at the moment what that would be is uncertain. Insurance is not on the FASB technical agenda yet, so it is likely that the Discussion Paper will form part of the FASB agenda proposal.

Changes in the insurance liability

The staff noted that the working approach in the Discussion Paper has been to treat the premium received on short-dated insurance contracts as revenue, but to unbundle the revenue received on long-dated contracts and recognise the deposit element separately.

Board members noted that the treatment of short-dated contracts was troublesome given the direction of the revenue recognition discussions; some stating that they were not prepared to include a preliminary view that was contrary to the direction of the revenue recognition project. Those Board members were of the opinion that unbundling provides better information. What was more important was a thorough discussion of the issue.

The Board accepted a staff suggestion that the Discussion Paper should not come to a preliminary view on unbundling short-duration contracts but should explain what unbundling meant in this context and what the implications of such a treatment would be.

The Board discussed an example that addressed revenue and acquisition costs. The Board agreed that the excess of the initial premium received over the initial measurement of the liability should not be netted against the acquisition costs incurred. Netting would be inconsistent with normal offsetting restrictions in IFRSs and would obscure input information about the level of acquisition costs.

Unit-linked and index-linked payments

Presentation of separate account assets and separate account liabilities

The Board agreed that an insurer should recognise separate account assets, and the related obligation to pay policyholder benefits, unless the insurer has a contractual obligation to pay all cash flows from the separate account assets to the separate account policyholders (a 'pass-through' obligation). The Board appeared to accept that this presentation could be a 'single line' presentation (a single line for unit/index-linked assets and a single line for the policyholder benefits liability).

Measurement of separate account assets

The staff explained that in most countries, insurers measure assets in unit-linked funds at fair value and measure the unit-linked benefits on a similar basis: if the obligation is to pay benefits equal to 100 units, the benefit is measured at 100 times the current unit price.

In May, the Board noted that accounting mismatches can arise if some or all of the unit-linked assets:

  • (a) cannot be recognised (for example, if the unit-linked assets include shares or financial liabilities of the issuer itself (treasury shares) or goodwill in subsidiaries);
  • (b) are recognised, but cannot be measured at fair value (for example, because an applicable standard requires another measure); or
  • (c) are measured at fair value, but changes in their fair value must be recognised outside profit or loss.

The Board redebated this issue at some length in an attempt to develop an approach that would avoid these mismatches, but without success. The Board agreed that the Discussion Paper should include a full discussion of this issue, the conflicts that exist within IFRSs, and the challenges that the Board faces because of the mixed attribute model within which it is working. However, no preliminary view would be expressed.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.