Insurance contracts – education session and outreach summary

Date recorded:

The IASB staff introduced the session by reminding the Boards of the extensive outreach activities that have been undertaken during the exposure draft comment period. Those activities have included webcasts, conference appearances, meetings with industry groups in many countries and regions, ratings agencies, regulators and supervisors, analysts and others. These activities together with a preliminary reading of comment letters received on the IASB Exposure Draft and the parallel FASB Discussion Paper have enabled the staff to identify the critical issues that need to be given priority as the Boards commence redeliberations in January 2011.

The staff introduced a proposed project timetable that would permit the IASB to ballot an IFRS in June 2011.

IASB staff presented a paper that reminded the Boards why the IASB (and subsequently the FASB) had undertaken this project. The overriding reasons were that the current accounting and financial reporting requirements are opaque and impair comparability. There was no substantive discussion of this paper.

IASB staff also presented a refresher on the proposed measurement model. It was noted that IFRS 4 (uniquely in IFRSs) permits different accounting policies within an organisation, such that an insurer with operations in four jurisdictions might consolidate information based on four different sets of accounting requirements. Generalised comparisons between insurance accounting in a number of jurisdictions could be made, but detailed comparisons were extremely difficult. The impetus for change has come from the industry as well as users, who wanted a unified model, not only for external financial reporting but for operational reasons as well. Again, there was no substantive discussion of this paper.

Issues identified in the outreach activities

Need for an IFRS

The IASB staff confirmed that, outside the United States, there was a high degree of support for an IFRS on insurance contracts.

However, the outreach activities also highlighted a concern that to address thoroughly all issues raised during the exposure period in the five-to-six month period proposed by the IASB was potentially overly ambitious.

Principal areas of concern and/or controversy

As a result of the outreach and preliminary review of comment letters received so far, the staff has identified five critical topic areas:

  • Volatility in profit or loss
  • Unbundling insurance contract components
  • Residual vs. composite margin
  • Presentation (especially with respect to profit and loss/ other comprehensive income items)
  • Short-duration contracts


There was a general discussion of these areas, which the staff tried hard to keep out of technical re-deliberation. Board members declared various degrees of sympathy or lack of sympathy with some of the issues identified, giving the staff and their fellow Board members an idea of interesting debates to come.

For example, some Board members were not disposed to using an IFRS to avoid volatility in profit or loss. These Board members wanted to portray economic reality and the economic mismatches that exist as a result of insurance activities. Others observed that some of the measurement guidance proposed (and the resulting effects in profit and loss) fitted well with developed markets such as those in North America, Europe and Japan, but were decades ahead of insurance markets in some other IFRS jurisdictions (e.g., parts of Asia).

It was noted that in several key areas, such as the discount rate and presentation issues and the cross-cutting issues with financial instruments and revenue projects, there was no consensus among either the major audit networks or large industry players.

Another critical decision would be the extent to which the IASB's decisions in IFRS 9 guided their decisions for insurance. The mood of the meeting was that it would be necessary to be consistent between the two.

Boundary issues between what are insurance contracts and derivatives, and between financial guarantee contracts will need careful consideration.

With respect to risk adjustment, the comments fell largely into two groups: those with an interest in having an accounting treatment as close to the Solvency II regulatory requirements, and others.

On unbundling, views in the comments letters examined so far and other outreach have been mixed. The ED sought to clarify the principle outlined in the IASB's Discussion Paper, but it was clear from the feedback that this attempt had not succeeded. There were questions about whether one could use unbundling the effects of the measurement rules. On the other hand, some wanted unbundling so that they could measure some components at fair value and others at amortised cost.

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