Insurance Contracts

Date recorded:

Project timetable

The staff presented a revised project timetable, one that suggested that the exposure draft of the Board's proposals would be published in April 2010 for 120 days' comment, with redeliberation completed by June 2011.

This revised timetable was not well received by the IASB Chairman and several Board members. The staff was instructed to ensure that the exposure draft was published no later than December 2009.


Measurement approach for insurance contracts/ Using the updated IAS 37 model as a candidate for measuring insurance contracts

The Board agreed that sufficient progress had been made on the IAS 37 model for liabilities that a modified IAS 37 approach should be considered as a candidate for measuring insurance liabilities. At the same time, the 'current fulfilment value that includes a margin for the cost of bearing risk and a residual margin' approach was removed from consideration.

In proposing the IAS 37 measurement model, the Board noted that the objective in IAS 37 is to measure the amount that the insurer would rationally pay to be relieved of a liability. In the absence of an active market, the modified IAS 37 model clarifies that the insurer can estimate that amount by looking at the burden to the insurer of having to fulfil the obligation over time, or what it would rationally expect to receive from a third party to assume that liability. The margin would be calibrated such that there was no day one gain or loss, except that the insurer would recognise revenue at the inception of the contract to the extent that it provides recovery of the incremental acquisition costs incurred.

Although agreeing that IAS 37 should be added to the measurement candidate list, several Board members wanted greater assurance that the modified IAS 37 model was sufficiently robust to be applied to insurance liabilities. In addition, the Insurance staff team needed to provide further thoughts about how the IAS 37 model would be applied to insurance contracts and what additional Application Guidance might be necessary. Board members wanted a joint session with the insurance and IAS 37 teams to provide them with greater assurance and comfort on this fundamental issue.

One Board member also wanted greater comfort on the risk margin: was it a surrogate for the entity's cost of capital or was it compensation for bearing the insured risk. Some other Board members were not certain that there was a difference between the two. However, there was agreement that the Board should be explicit about the measurement objective inherent in the risk margin.


Current exit price

Subject to the modified IAS 37 model being articulated appropriately with respect to insurance, the Board agreed not to continue considering current exit price as one of the measurement candidates for insurance contracts.

Some Board members were concerned that the exit price provided a 'sanity check' for the measure of the insurance liability. Board members were reminded that the requirement to look at what the entity would rationally accept or demand to assume the liability from another provided a check on the 'would rationally pay' criterion in the measurement requirement.


Field tests

The Board agreed a staff proposal to undertake 'targeted field tests', to begin before the exposure draft is issued, to assess whether the proposals will achieve their objective and how the proposed approach would change current practice. The staff expects to engage approximately 15 insurers (preparers), with follow-up involvement from user groups.

The staff had hoped to complete their work in advance of the exposure draft being issued; however, given the explicit direction of the Board to have an exposure draft by December 2009, not all work might be completed prior to the exposure draft being issued.

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