Hans van der Veen (Practice Fellow), together with Peter Clark, led an education session that discussed a list of measurement attributes identified by the project staff as 'viable candidates' for selection in the case of insurance contracts. The purpose of the discussion was to identify those candidates for which the Board needed or wanted further information.

AP 3A: Overview

Measurement attributes suggested by respondents to the IASB Discussion Paper

A Board member expressed concern about how the Board's current thinking on revenue recognition to insurance contracts; in particular how to articulate the notion of a performance obligation. The staff agreed that this needed more thought, especially in situations in which claims might trail an annual contract by several months. In many cases, settlement of the obligation was treated as an issue separate from revenue recognition.

A Board member asked for clarification as to the extent that unearned premium model was consistent with the customer consideration model being developed in the revenue project; in particular, would customer behaviour be considered. The staff admitted that the unearned premium model concentrated on the measurement of the unearned premium liability and was silent with respect to revenue recognition; this would need to be clarified.

Another Board member expressed concerns about the current pricing (or entry value) model. The staff noted that there was no support among members of the Insurance Working Group for this approach and that the staff did not intend to develop it further.

Features of a measurement attribute and building blocks

A Board member asked for clarification on the comment in paragraph 6(c) that some respondents to the DP 'argued that the risk margin should reflect the cost of bearing risk, but not include any further profit that the entity or a market participant would require for bearing the risk'. The staff admitted that they do not currently understand what the difference is, but note that some respondents think that the two are different while other respondents think that there is no difference! A Board member noted that some respondents see the two concepts as the difference between the exit price model and the 'settlement model'.

Addressing the issue of the 'cost' of bearing risk, a Board member reminded the Board and the staff that the definition of 'cost' in IFRS was the 'the amount of cash or the fair value of the other consideration given' In his view, this should make exit value and settlement value the same at contract inception.

AP 3B/3C: Candidate Measurement Approaches

The staff noted that the approaches listed in the agenda paper were not listed in any order of preference. In addition, the staff would discuss the objective of the margin(s) included in each if the candidates, but would not discuss in any amount of detail how those margins should be estimated. Finally, some generic issues, common to all approaches, would not be addressed: including policyholder behaviour and policyholder participation; the impact of diversification of risk margins; the attributes of the discount rate in relation to the characteristics of the cash flows of the insurance liability and certain financial statement presentation issues.

The candidates fell in to three groups:

• The current exit value model as proposed in the DP;
• Three variants of the 'current fulfilment model'; and
• An unearned premium model for the pre-claims liability of short-duration contracts.

A Board member challenged the 'current fulfilment' models presented because they were inconsistent with the customer consideration model being developed in the Revenue project. He saw no reason why revenue from insurance contracts should be recognised using different fundamental principles. In addition, the current fulfilment model was inconsistent with the principles being developed by the Board in the IAS 37 project. Another Board member supported this intervention. The staff noted that they had addressed this point later in the paper [paragraph 37]. The first Board member reiterated the point that the current exit value model was the only approach that was consistent with the Board's approaches in its revenue and IAS 37 projects. The staff agreed, but noted that the other possible approaches had been suggested by several respondents. It was a necessary part of the Board's deliberations towards developing an exposure draft to discuss those suggestions.

Board members noted that the current fulfilment models presented all relied to some extent on entity-specific cash flows rather than cash flows that would occur for all market participants. Some Board members were very uncomfortable with using entity specific cash flows because of the lack of rigor over what those cash flows might contain. Others could not find any insights from the summaries of the current fulfilment models presented.

In response to a question from the staff, Board members requested more information from the staff, in particular they wanted the staff to reflect the consistency (or lack of consistency) with the Framework, existing IFRS and other projects. Board members also noted that the answers developed by the staff needed to consider what might happen if the premium received was treated as a deposit rather than revenue.

Agenda Paper 3D was not discussed.