Insurance contracts

Date recorded:

Discount rate for non-participating contracts

The Boards continued their discussion of discount rates for non-participating contracts by discussing the staff query whether to allow the substitution of a specified rate (e.g. one based on the interest rate of a high quality corporate bond) as a practical expedient to allow insurers to determine their discount rate in certain circumstances.

The Boards expressed mixed views, raising points for and against the development of an approach that uses a proxy rate. Ultimately, no conclusion could be reached. As such, the Boards cautiously agreed that a proxy rate might be used, but instructed the staff to explore that possibility and provide the Boards at future meetings with information regarding the selection of such a rate and the circumstances in which it could be used.

Cash flows

The staff presented a paper to the Boards addressing the estimation of future cash flows, the treatment of specific cash flow items such as general overheads, and the level of detailed guidance proposed in the Exposure Draft / Discussion Paper.

The staff requested that the Boards:

  • clarify the measurement objective of expected value to refer to the mathematical mean;
  • clarify that implementation would require enough scenarios to be considered to satisfy the measurement objective rather than requiring all possible scenarios to be considered;
  • confirm which costs could be included within the cash flow;
  • confirm that indirect costs should be expensed; and
  • eliminate "incremental" from the definitions.

The Boards agreed with the staff that the measurement objective should be based on the mathematical mean of the expected future cash flows although there was some concern about the application of this to general insurance business due to the variability of future cash flows. In addition, the Boards generally agreed that sufficient, rather than all, scenarios should be considered by the insurers. The Boards also agreed that only costs directly related to contract activity should be included within the liability cash flows rather than the wider concept of attributable costs proposed by the paper. This redefinition replaces "incremental" and would also drive the designation of which costs could be included. The Boards instructed the staff to draft appropriate wording in line with this decision when preparing the final standard.

Explicit risk adjustment

The staff presented a paper to the Boards on the results of consultations on the use of an explicit risk adjustment but the Boards were not asked to decide between an explicit risk adjustment or a composite margin at this stage. Instead, the staff asked the Boards to consider whether an explicit risk adjustment would, in principle, provide useful information to users of financial statements. The staff noted that there were two distinct streams of comments. Some users felt that information on the risk adjustment was useful and necessary, while others felt that the costs, difficulty and market inconsistency that were possible with risk adjustments rendered the information provided by an explicit risk margin not reliable for financial reporting.

The Boards discussed the issues presented, providing points for and against explicit risk margins, many of which had been considered in previous debates. Many members commented that it was difficult to dissent with the staff's view on risk margin as the question was not touching the issue that had divided them in previous discussions on this subject. A significant issue was identified in that the effective use of a risk margin in dependant on the estimate of the liability cash flows being prepared on an unbiased basis and some Board members were not convinced that this was always possible. The Boards decided that the staff should arrange an educational session on how risk margins are calculated in the market and the Boards will reconsider the issue at that point.

Day one gains and losses

The staff asked the Boards to consider whether an insurer should recognise day one gains, should be required to recognise day one losses, and whether the residual or composite margin could become negative on subsequent measurement.

There was no significant support for the recognition of day one gains amongst the Board members, and there was general agreement that day one losses should be recognised on day one. A small number of concerns were raised, and the Boards expressed a general feeling that margins should not become negative. A few Board members supported the possibility of recognising a negative residual margin, but only where the sum of the risk adjustment liability and the negative residual margins remained a net liability.


The staff presented an educational session to the Boards focusing on the implications of unlocking and remeasuring residual or composite margins. The staff also presented a number of examples of how various scenarios could play out under different unlocking and measurement assumptions. Although the Boards discussed this and raised a number of questions and comments, no decisions were made.

The Boards instructed the staff to prepare a paper for discussion based on the following guidance:

  • use of floating margins (i.e. remeasuring the residual/composite margin for both favourable and unfavourable changes in non-financial assumptions);
  • an onerous contract tests should be included; and
  • only non-financial assumptions could be considered in the adjustment of the residual margin.

The Boards requested that the staff discuss these proposals with users prior to presentation to the Boards for decision.

Refresher on presentation models

The staff presented a short session to the Boards as a reminder of the issues arising from the presentation proposals set out in the ED / DP and which would need to be considered when making other decisions within the insurance project. The Boards noted the feedback from the comment letters requesting volume of business information being included in the statement of comprehensive income. No decisions were made, but the debate appeared to suggest that the Boards or their constituents cannot yet identify a clearly superior presentation format.

The Boards requested that the staff consider the work being performed by EFRAG on presentation which is expected to be presented to the IASB next week.

Discounting non-life contract liabilities and locking the discount rate

The Boards did not consider these papers and have deferred them to the next meeting.

Correction list for hyphenation

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