Insurance contracts

Date recorded:

Unbundling: Overall considerations (Paper 12F)

The staff presented a paper for the Boards' consideration and discussion on the background to unbundling, the objective for unbundling, what should be unbundled, and what the next steps should be for unbundling. This was not a paper for decision and the Boards' discussion was intended primarily to provide further guidance to the staff.

The Boards' members expressed multiple views, both for and against unbundling, and raised a number of concerns about the information provided by the staff. Concerns raised focused on whether the components would be measured or recognised differently were they not part of the insurance contract. In this situation, there was strong support for unbundling these components, but little consensus on how they would be identified or on how this could be implemented in practice. There was also concern amongst Board members that unbundling would likely require a significant application of judgement in identifying and measuring the components that would be unbundled.

The Boards discussions did not appear to indicate the presence of a significant trend towards a solution to the problem of unbundling, and given the nature of the concerns raised by the Board members we do not see any preliminary indications of a consensus between the different viewpoints.

Bifurcation of embedded derivatives (Paper 12G)

This paper focused on whether the Boards should carry forward current requirements for the separation of embedded derivatives from the host contracts. The paper did not discuss whether:

  • investment components and obligations to deliver goods and services should be unbundled
  • "riders", embedded derivatives that are limitations, or additional payments, to the sum assured, should be separated, or
  • how to account for derivatives embedded within an investment contract with discretionary participating features.


These issues are intended to be discussed in separate papers at a future date.

The staff recommended that current practice (i.e. that embedded derivatives should be separated out) should be maintained. With fairly limited discussion, the Boards expressed strong support for this proposal (IASB: 13; FASB: 7).

Objective for an explicit risk adjustment (Paper 12D)

Without discussing any other issue, e.g. the practical implementation of a risk adjustment, the staff proposed a draft wording for the objective of an explicit risk adjustment. The objective was meant to address concerns raised by respondents to the ED/DP, and centred on the notion that the risk margin should be an amount that renders an insurer indifferent between retaining and transferring an insurance obligation. Unfortunately, the Boards deemed the proposed text confusing and many members raised the concern that this approach represented a return to an exit value model.

Criticism of the proposed wording resulted in a Board member putting forward an alternative proposal which simplified the approach the Boards had included in the ED/DP. A number of minor wording variations around this central proposal were discussed and the debate reached a consensus. The risk adjustment was defined as the compensation the insurer requires for bearing the risk of the uncertainty that the cash flows will exceed those expected. The Boards also agreed to include guidance that, in quantifying the positive risk adjustment, insurers should take into account the possibility that cash flows may also be less than expected.

Discounting for ultra long duration cash flows (Paper 12E)

The staff paper analysed the additional considerations for the discount rate in cases where the yield curve needs to extend beyond observable market interest rates because cash flows will be due/received beyond that time horizon to complete the recent tentative decisions on the selection of the discount rate and the prohibition to lock it in.

The staff recommended that the effects of changes in the discount rate for ultra long duration cash flows should be reflected in other comprehensive income and should reflect all changes in measurement attributable to the unobservable part of the yield curve an insurer would need to extrapolate.

The Boards were not receptive to this recommendation because it created an exception within the new accounting model principle to recognise all changes through profit or loss. Overall, the Boards concluded that this issue should be assessed at a later date when the re-deliberations on the overall accounting model were more advanced.

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