Insurance contracts

Date recorded:

Accounting mismatch and volatility overview

The staff indicated that the majority of the papers to be presented were for discussion and that the results of these discussions would be taken into consideration, along with the discussions of the Insurance Working Group to be held on 16 May 2011, to determine the direction of the staff's work in this area. No decisions were asked at this meeting.

The staff further indicated that these discussions were held separately with the IASB and the FASB. In the staff's view, the individual Boards should consider this issue separately as a result of the differences in presentation, particularly on recycling and on the presentation of the assets backing the insurance contracts.

Reducing accounting mismatches in profit or loss through presentation

The staff analysed the sources of the accounting mismatches that arise when insurance assets and liabilities are measured on different bases. The staff recommended that an insurer should be permitted to recognise within other comprehensive income the differences arising between the original discount rates at contract inception and the current discount rate determined based on market interest rates observed at the reporting date. This option should be granted if that approach would eliminate or substantially reduce an accounting mismatch. The staff further recommended that the option should be applied by portfolio.

Some Board members felt that enough action had been taken to address volatility and that this proposal would be "a step too far". In particular, Board members mentioned:

  • the proposals agreed by the IASB (but not the FASB) on 11 May for participating contracts; and
  • the decision to use a top-down method to determine the discount rate.

In addition, Board members expressed concerns that this proposal could potentially conceal real economic mismatches or that it would only shift genuine accounting mismatches into other comprehensive income rather than addressing the cause of the mismatch. Other Board members raised concerns that if insurers were permitted to move volatility into other comprehensive income, then other industries would need to be treated the same way and other accounting standards would need to be modified to permit this.

Other Board members supported the staff recommendation. They raised the point that the Board has applied essentially a similar approach for pension accounting, and that the accounting standards should aim for a consistent approach to the treatment of variances and the use of OCI.

Support for the staff proposal was also motivated by a preference for addressing volatility in the income statement rather than amending asset valuation rules (as proposed in Paper 6A). Overall, there did not seem to be a significant amount of support for the staff recommendation.

Implications of using OCI to reduce accounting mismatches in profit or loss

The staff noted this topic only applied if the Boards eventually supported the staff proposals regarding reducing accounting mismatches in profit or loss. The staff introduced the paper and made a number of observations, but no recommendations. Key issues discussed were:

  • how to apply a locked in approach to insurance contracts with floating interest rates when the difference between the current discount rate and the locked-in rate is presented in OCI;
  • whether an onerous contract test should be required where a locked-in discount rate is used; and
  • how to show the effect of duration mismatches that may be concealed by the use of OCI.

The majority of Board members seemed reluctant to specify a preference before hearing the comments of the Insurance Working Group on these issues.

Among the Board members who expressed a view several were opposed to the direction of the staff observations for guarantees and for onerous contracts. They noted that this approach would allow changes in options and guarantees, representing true economic mismatches, to be recognised in OCI. Some Board members were also concerned that this use of OCI may necessitate revisions of other standards in order to maintain a level playing field across other industries as well as consistency within IFRS.

Assets backing insurance contract liabilities

The staff asked whether the IASB should change the requirements of IFRS 9 to present the gains and losses on financial assets backing insurance contract liabilities within other comprehensive income rather than in profit and loss (either changing general requirements of IFRS 4 or specifying different requirements for assets backing insurance contracts within the insurance standard). The staff presented the paper to the Board and recommended that IFRS 9 should not be changed.

Overall, the Board members were supportive of the staff recommendation, although no official vote was taken.

As they expressed their support for the staff recommendation Board members commented that they believe earnings management through realisation of gains should be avoided and this could be achieved effectively if the available-for-sale category was not reintroduced. Some members raised concerns that if previous papers should be implemented, it could lead to an uneven playing field across different industries and inconsistent treatment of similar transactions (with some going through profit and loss and others going through OCI) unless changes to IFRS 9 were made. That said, they still supported the staff recommendation.

Other Board members were concerned that if the use of OCI proposed in Paper 6B was rejected, the mismatch between asset valuations and liability valuations would remain, and would necessitate revisions to the measurement rules for the assets backing the insurance contracts in order to address volatility. In particular, these members were opposed to implementing separate measurement rules (either within IFRS 9 or as an override of IFRS 9 within IFRS 4) for the assets backing insurance contracts.

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