Project assumptions

The staff presented the current assumptions under which the insurance contracts project is being developed for the consideration and approval of the Board members.

Key assumptions include:

• that the development of a standard for insurance contracts is appropriate
• the standard focuses on insurance contracts only, not the entities or underlying assets
• insurance contracts will be considered as a bundle of rights and obligations generating a package of cash flows
• insurance contracts will be measured at the portfolio level
• the use of observable market consistent inputs in a current estimates model
• contracts will be measured from the perspective of the insurer fulfilling them
• insurer's own credit shall not be considered.

The staff asked the members of the Boards to ratify these assumptions.

In general, the members of the Boards had no significant disagreements with the assumptions, although a small number of additions and considerations were suggested, particularly to include explicit references to consideration of the interaction between the IFRS on insurance contracts and IFRS 9 for the measurement of assets held by insurers to fund the insurance contracts cash flows.

Discount rate for non-participating contracts

The staff presented a paper on the discount rate to be used in discounting non-participating contracts, and recommended that the Boards confirm that:

• the objective to adjust the future cash flows for the time-value of money and reflect the characteristics of the insurance contract liability
• the method for determining the discount rate shall not be prescribed
• guidance shall be provided on determining the discount rate which shall be adjusted for risks that are not included elsewhere in the measurement model.

The Board members held a significant debate on the calculation of the discount rate for non-participating contracts and addressed numerous issues, including:

• the calculation of an illiquidity adjustment
• the use of top-down and/or bottom-up approaches, and the differences that may arise as a result
• whether the substance of the transaction could permit the use of a standard borrowing rate as a proxy after removal of the insurer's own credit risk
• the impact of discount rates on pricing decisions and products
• comparison to the discount rate discussed in the leases project currently underway.

Overall, the Boards concluded that there were no significant objections to the proposed objective for discounting, but that additional clarification of the wording was required, and that they would not prescribe a model for the calculation of the discount rate. Insurers would be permitted to use any methodology provided the resulting discount rate meets the IASB's objective.

Although the Boards concluded that guidance should be provided on the calculation of the discount rate, a number of concerns about staff recommendations were raised, and the Boards decided that the staff should consider these concerns during the drafting phase and the Boards would rule on the wording at that point. The Boards also decided to include a requirement that yield curves for each major relevant currency should be disclosed.