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Insurance contracts — Education session

Date recorded:

Three papers were covered at this meeting during which no decisions were taken.

Paper 2A compared presentation methods and was covered most extensively by the IASB staff. The IASB and FASB have in prior meetings tentatively decided that insurers should present premiums, claims and benefits for the period in the statement of comprehensive income. Paper 2A educated the IASB members on which measures of premiums and claims/benefits should be presented for contracts accounted for using the building block approach. The staff considered the different presentations considered by the IASB and FASB in their June 2012 education session: the summarised margin presented in the 2010 Exposure Draft, the earned premium, the written premium and premiums due methods of presentation. The staff recognised that each of the methods presented has advantages and disadvantages but, on balance, the staff planned to recommend the earned premium presentation whereby premiums are allocated to periods in proportion to the value of coverage and any other services that the insurer has provided in the period and claims are presented as expenses in the period when incurred.

During the session, there was no support for the written premium method of presentation. Some IASB members felt that the earned premium approach best meets the criteria in the revenue recognition standard. Some members questioned whether this method could be seen as a cost plus approach which can only be used in certain circumstances under the revenue recognition guidelines. It was also noted that this approach does not take into account the effects of any experience adjustments. Other members noted that the earned premium method is complex and the benefit to users of using such a method should be weighed against the costs of producing it. Some members were also in favour of just retaining the summarised margin approach and did not feel that the earned premium method would provide any additional benefit to users of financial statements. The requirement to exclude the investment component from premiums and claims (the disaggregation requirement) received overwhelming support from the IASB.

During the discussion on the premiums due method, some Board members noted this method does not align with the revenue recognition standard’s principles. Some members noted that this approach is currently used by some insurers and is less complex than the earned premium approach. They observed that, in most instances, the end result will not differ significantly from the earned premium method.

Overall, the staff recommendation received mixed reactions from the IASB with refinements suggested to the staff recommendation.

Paper 2B “Presentation of non-claims fulfilment costs” was covered only briefly in the session with the staff recommending that in an earned premium presentation format:

  • A portion of the premium should be allocated to cover non-claims fulfilment costs.
  • The premium allocated to cover non-claims fulfilment costs should be included in the insurance contract revenue in the periods in which the costs are expected to be released from the liability for remaining coverage.
  • The amounts presented as expenses should be the actual costs incurred or added to the liability for incurred claims in the period.

The staff acknowledged that the application guidance should explain that, under certain circumstances, an insurer could use simpler procedures that produce results that are not materially different. Some members commented that the term “non-claims” can be confusing to users and a better description should be provided for these type of costs; otherwise, most members were in favour of the staff recommendations although no vote was taken.

Paper 2C “Presentation of acquisition costs” was also briefly covered in the final minutes of this session with members in support of recognising the cash flows relating to acquisition costs in the statement of comprehensive income over the coverage period.

No vote was taken on any of these papers.

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