Insurance contracts – Phase II

Date recorded:

Helmut Perlet (representing the CFO Forum), Jerry de st Paer (representing the Group of North American Insurance Enterprises (GNAIE)), and Masaaki Yoshimura (representing four major Japanese life insurers) presented a summary of recommendations those organisations have made regarding the development of an accounting model for insurance contracts.

The representatives made a brief introduction explaining the insurance industry's role in the economy and its objectives for developing a global accounting standard. They then summarised their proposals, which were also presented to the Insurance Working Group in June.

Below we highlight those proposals that were subject to discussion at the Board. A comprehensive list of the proposals made by the insurance industry is in the observer notes available from the IASB Website.

Initial measurement

The insurance industry is proposing that no gains or losses should arise on initial recognition.

The Board commented that this differs from the tentative decision made by the Board that gains or losses can arise on inception if the insurance company makes errors or omissions when pricing their contracts.

Liability measurement

Mr Perlet explained the view of the CFO Forum that the liability on both life and non-life contracts should be discounted to reflect the present value of future cash flows with allowance for inherent risk and uncertainty.

GNAIE on the other hand believes that life and non-life insurance contracts have significant differences that should be reflected in measurement. For most non-life contracts, it would be difficult to predict whether losses will occur, when they will occur, or the amount that should be paid to the policyholder. Their disagreement with an 'exit value' model, which the Board has indicated that it favours, is based on a belief that this value cannot be measured reliably because there is no active market for non-life insurance contracts where values can be obtained. Mr Paer explained that applying discounting to such contracts in many cases would add an element of uncertainty to the liability component that would produce incomparable and generally less useful results.

Board members commented on the model introduced by GNAIE. Many Board members said that it seemed like a step backwards from the current liability measurement model, which is based on 'exit value' and the Framework. It was noted that the model presented by GNAIE would conceptually not be in accordance with the current model applied for pensions in IAS 19 or for liabilities measured under IAS 37.

Separate customer intangible asset

The industry believes that a separate intangible asset should be recognised that represents costs of acquiring the insurance contract, in addition to an intangible representing future payments that the policyholder must make to retain a right to guaranteed insurability.

Board members seemed to have difficulty understanding what would justify recognising two different intangible assets as the policy would only represent one cash flow.


The insurance industry proposes that no underlying financial or non-financial contracts should be unbundled because policyholders view insurance products as one product. Unbundling of contracts would require extensive judgement and is viewed as unnecessary since the industry values all components in a contract on an aggregate level.

Board members discussed this briefly. Some questioned whether bundling when the entity has more than one component would disguise different profit margins.

Participating contracts

The proposal from the insurance industry is that liabilities should be the best estimate of future policyholder benefits. These should be based on assumptions reflecting what the policyholder will receive on the insurance contract. It was also stated that payments, such as dividends, to a policyholder were fundamentally different from dividends paid to equity-holders and should not be included in equity as the insurance company could choose to pay the policyholder without paying the shareholder.

The Board probed the proposal by the industry to understand how the liability is measured. Based on explanations from the insurance industry participants, measurement of the liabilities would depend on what the insurance company would pay to the policyholder rather than what the insurance company is contractually obliged to pay. This differs from the Board's tentative conclusion that the part of the liability that does not represent an unconditional obligation should be recognised in equity.

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