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Insurance Contracts

Date recorded:

Unbundling

In September 2006, the Board tentatively concluded that an insurer should not unbundle the insurance, deposit, and service components of insurance contracts if the components are so interdependent that the components can be measured only on an arbitrary basis, but should unbundle them for measurement if such interdependencies are not present.

Based on concerns raised by constituents that unbundling would be arbitrary, artificial, and burdensome in most cases and that the practical effect would not be apparent, the staff brought the issue back. (The issues are outlined in the Observer Note available on the IASB's Website.)

The Board had a thorough debate on the relationship between unbundling and measurement of the different components of an insurance contract and finally reaffirmed the tentative decision on unbundling with a majority of 8 in favour and 6 opposed.

It was noted that the following scenarios should be considered in this connection:

  • (a) The contract consists of components that have no interdependence. In this case the contract should be split into an insurance contract measured under the insurance model and other contract(s) to be accounted for under the respective IFRSs. Scenarios (b) and (c) would then be relevant for the insurance contract.
  • (b) The components of the insurance contract are fully interdependent. The contract should be measured under the insurance model and, since in this case unbundling is not feasible, the components should be measured and presented together.
  • (c) The components of the insurance are interdependent to some extent. The contract should be accounted for under the insurance model. To the extent unbundling is possible, the components should be measured and presented separately. The measurement consequences are that for the deposit and service components, IAS 39 Financial Instruments: Recognition and Measurement, IAS 18 Revenue, and probably other IFRSs apply.

 

Sweep Issues - substantive issues in Board members' comments on pre-ballot draft

Measurement attribute - Cash flow estimates

The Board was asked whether it wants to retain the measurement attribute 'current exit value' or whether this term should be changed to 'current exit price' as used, for example, in the Discussion Paper on Fair Value Measurements (DP FVM).

The pre-ballot draft of the Insurance Contracts Discussion Paper requires estimation of future cash flows taking into account the insurer's strategy for determining the level of service provided to policyholders and its approach to claims management, as well as the insurer's efficiency in providing that level of service and implementing its selected approach to claims management.

The Board noted that referring to entity-specific data rather than market data could but does not necessarily lead to different outcomes than under DP FVM. In absence of observable market data the DP FVM allows the use of entity specific data ('Level 3 inputs').

The Board decided to continue to use the term 'current exit value'. The staff was directed to explain in more detail in the Discussion Paper how current exit value differs from fair value and to point out that the Board is currently not aware of significant differences.

Other issues

The Board asked the staff to amend the Discussion Paper with regard to the guidance on determining risk margins, the interaction of the insurance contracts project with the revenue project, and customer relationship. The rephrasing was not discussed in detail.

Project plan - Issuance of the Discussion Paper

The Board decided (12 in favour, 2 opposed) to issue the Discussion Paper as amended above within the next several months.

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