Unbundling

The Board considered when an insurance contract that contains insurance, deposit (financial) and service components should be accounted for as if they were separate contracts (unbundling). The Board considered the requirement to unbundle when the components were not interdependent.

After a long debate, during which the Board discussed consistency of this requirement with the proposed guidance for multiple segment contracts in the revenue recognition project, the Board asked the staff to redefine the conditions and guidance when the contract was interdependent and could not be unbundled (that is, valued separately).

Presentation of the performance statement

The Board continued with an educational session on presentation of insurance contracts in the performance statement.

The Board was presented with five presentation options:

• (a) Treat all premiums (including the portion that pays for the deposit component) for all insurance contracts as revenue.
• (b) Unbundle all (or specified) insurance contracts into an insurance component, as in (a) and a deposit component - a fee approach.
• (c) Treat all premiums for all insurance contracts as deposits, and all claims and expenses as repayments of deposits. Use the margin model for the margin.
• (d) For insurance contracts that meet specified criteria (for instance, life insurance contracts, or long duration contracts), treat all premiums for all contracts as deposits, as in (c). For all other insurance contracts, treat all premiums as revenue, as in (a).
• (e) Permit insurers to choose for each class of insurance contracts between a revenue presentation, as in (a), and a deposit presentation, as in (c).

After a thorough discussion, during which the Board considered the level of granularity required, the Board seemed to revert to unearned premium model for short term policies and (c) or (d) for other insurance contracts. The Board will reconsider these models at its November meeting, after received feedback from insurance working group.

Deposit floor for Insurance contracts

The Board rediscussed the issue of deposit floor for insurance contracts. The implication of usage of measurement model based on expected cash flows resulting from insurance contracts was that no deposit floor applied for measuring insurance contracts.

In the debate on this implication of the measurement model, the Board discussed the scope of an insurance contract as well as consistency of the deposit floor in banks and insurance.

The Board tentatively confirmed that no deposit floor applied in measuring insurance contracts. Nonetheless, the Board asked the staff to further analyse the implications of that decisions on more complex insurance products. Moreover, the Board directed the staff to analyse possible arbitrage opportunities arising from this decision in groups consisting of both a bank and an insurance company.

Timetable

Given the decisions taken on the previous sessions (including lack of final decisions on several subjects), the Board decided to reconsider the timetable for the project at its November meeting.