Insurance contracts

Date recorded:

At its September 2006 meeting, the Board received a briefing from insurance trade associations on their recommendations on a series of principles used when accounting for insurance contracts. At the October meeting the Board reviewed its tentative decisions in the light of the proposals from these organisations.

Below we have highlighted the proposals that were reviewed by the Board. For a more comprehensive list of the background we refer to the observer notes available from the IASB Website.

Non-life insurance claims liabilities

One of the insurance trade associations present at the September meeting stated that it believes that life and non-life insurance contracts have significant differences that should be reflected in measurement. It also stated that applying discounting to non-life contracts in many cases would add an element of uncertainty to the liability component that would produce incomparable and generally less useful results.

The Board reconfirmed their disagreement with this view and concluded, in line with their previous tentative decisions, that these liabilities should be measured on a discounted basis, including an explicit risk margin.

Non-life insurance pre-claims liabilities

The Board reconfirmed that it prefers a single measurement contract and also that these contracts should be measured at current exit value.

Initial measurement - gains at inception

The insurance industry is proposing that no gains or losses should arise on initial recognition. The Board was split. It decided that the discussion paper should address and explain the rationale for both the position where gains at inception could arise and the position where the margin that may arise would be adjusted to the observed price, with the consequence that a gain would not be recognised.

Risk Margin

The Board reconfirmed that the measurement of an insurance liability should include a risk margin (based on an explicit and unbiased estimate) that the participant would take for bearing risk in a contract.

Service Margin

The Board reconfirmed that an insurance liability may have, in addition to the risk margin, a service margin that the participant would require to render services. The Board expressed that it would not require bifurcation between the risk margin and service margin in all cases.

Discount rate

The Board discussed and confirmed their tentative decision that discount rates should be consistent with observable market prices for cash flows with characteristics that match the insurance liability in terms of timing, currency and liquidity.

Measurement attribute

The Board reconfirmed that the discussion paper should use 'current exit value' as the measurement attribute.

Basis for estimates

The Board confirmed their previous conclusion that cash flows not related to the liability itself should be excluded from the measurement.

Review of assumptions

The Board concluded that all changes in estimates of both financial and non-financial variables should be recognised.


The Board had a longer discussion regarding unbundling. Some Board members thought that the wording set out in the agenda paper was inconsistent. The staff noted the comments from the Board and the Board confirmed their previous conclusion that an insurer should not unbundle if the components are so interdependent that measurement of isolated components would be arbitrary. It was also confirmed that the discussion paper should include examples.

Credit characteristics of insurance liabilities

The Board reconfirmed their previous conclusion that the current exit value of a liability reflects its credit characteristics.

Separate customer intangible asset as part of the initial investment made to acquire a customer relationship

The Board debated whether an intangible asset should be recognised to reflect the initial investment the insurer has done for acquiring a customer (and thereby recognise a separate asset on the balance sheet).

After a debate the Board concluded, in line with their previous decision, that acquisition costs should normally be recognised as an expense when it is related to cash flows already received or through future cash flows incorporated in the measurement of the liability.

The Board also discussed whether an asset should be presented separately from its insurance liability, if the liability includes cash flows related to a customer relationship. The Board was split, and it was decided that the discussion paper should be presented with arguments for both splitting the asset from the liability and for presenting the liability net.

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