Insurance Contracts

Date recorded:

Robert Esson, chair of the Insurance Contracts Subcommittee of the International Association of Insurance Supervisors, made a short presentation on four aspects of the IASB's insurance contracts project that were of particular concern to insurance regulators at present.


Timing of the insurance contracts project

Mr Esson noted that, including work done by the IASB's predecessor, the insurance contracts project had been running for over 10 years and that any delay beyond the projected May 2011 deliverable would risk losing the international consensus that exists currently. He noted that certain regions would likely develop their own solutions if there was a significant delay. An IASB solution is the IAIS's preferred solution, as they would seek to use IFRS financial information as input to (rather than to determine) insurance regulatory requirements.


Acquisition costs

Mr Esson noted that, especially in long-term insurance contracts, acquisition costs can exceed the first year's premium, but that overall the contract is expected to be profitable. This suggests that the insurance contract has value and that the value is bigger after the payment of acquisition costs.

In addition, he recalled the IAIS's recommendation to the Boards about the how to define the contract boundaries, which should help the Board with the issue of the renewal options in long-term contracts.


Day 2/Day 366

The run-off of margins was a significant issue that had been largely ignored in the past ten years and 'desperately' needed a solution before the ED was published. Any answer had to be simple, understandable and capable of being audited. He provided some examples that illustrated the issues and asked the Boards whether the margins run off based on release from risk or based on the expected cash flows.


Financial instruments

Mr Esson suggested that insurance companies were the largest purchasers of financial instruments in the world and that there was a need for consistency between the asset and liability side of the balance sheet - especially in relation to long-term insurance. In his view, there needed to be coherence between the assets and liabilities. He was concerned that the timings of the financial instruments project (that is, insurers' assets) and the insurance contracts project (the liability side) were problematical and could raise significant issues on transition. Insurers were very interested to see how the two projects interacted-in particular how will assumption unlock and margins run off for liabilities and whether amortised costs (as proposed in the recent IASB ED) would 'hedge' these liabilities.

Mr Esson took questions from Board members, during which he pointed out that the IAIS's view was that a useful set of IFRS financial statements would be a very important input to regulatory activities. Understanding an insurer's exposure to risk was important; so too was having useful and understandable measures in the financial statements.

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