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Insurance contracts

Date recorded:

The package of papers for the Board discussion focusses on the comparison of the variable fee approach with the general measurement model: Agenda Paper 2 provides a summary overview of the approach the Staff proposes for the meeting and the decisions reached to date, Agenda Paper 2A compares the variable fee approach with the general model and considers whether the two approaches could be viewed as part of a single measurement model; and Agenda Paper 2B considers three consequential issues for the variable fee approach arising out of the other tentative decisions.

Comparison of the general model and the variable fee approach (paper 2A)

Agenda paper summary

Adjusting the contract service margin for the embedded financial guarantees

In comparing measurement under the general model with the variable fee approach there are two differences: one around the treatment of embedded guarantees and the other around the discount rate used to accrete CSM (contract service margin).

The general model treats changes in embedded guarantees arising from changes in market variables as part of the changes in the underlying items and recognises them in comprehensive income (depending on the policy choice either in profit or loss or in both profit or loss and OCI).

The variable fee approach reflects the sharing of returns with the policyholders through the CSM. To the extent that the guarantees are triggered because the returns available for sharing from the underlying items are not sufficient to pay at or above the guarantee, the additional benefits to pay the guaranteed returns represent a service to the policyholder. Accordingly, changes in these guarantees are recognised in the CSM until the CSM is exhausted and then subsequent negative changes are recognised profit or loss. The different treatment is intended to reflect the different nature of the direct participating contracts, those that meet three criteria to qualify for the variable fee approach.

The Board was asked to confirm that, under the variable fee approach, the changes in fulfilment cash flows caused by guarantees embedded in insurance contracts should adjust the CSM before being recognised in profit or loss.

Discount rate

In relation to the CSM the general model uses the locked in discount rates, whereas the variable fee approach uses current discount rates. The main argument presented in favour of keeping two different accretion mechanisms is that the introduction of current rates for all contracts would be too complex.


Lastly, the Board was asked to consider explicitly the treatment of discretion in the CSM for participating contracts under the general model. Four approaches are considered in the paper, analysing what is promised to the policyholder and what is discretionary. The proposed definition of the effects of discretion to be recognised in the CSM would be the changes in the expected cash flows other than those changes that offset a change in a market condition.

Board discussion and tentative decisions

Adjusting the contract service margin for the embedded financial guarantees

One board member argued that all financial guarantees would be better presented in profit or loss or at least OCI, as opposed to CSM. Others echoed the staff concerns that recognising financial guarantees in profit or loss created too much complexity. The entity would need to split the value of the guarantee from the payment for the guarantee over time.  The current book yield of the underlying assets decision would also be affected.  On the other hand, to achieve ‘one model’ measurement and to recognise financial guarantees in CSM for non-variable fee contracts would be also problematic, because such guarantees are not well defined. Many felt that given the stage of the project, the need for a practical solution for different types of contracts outweighed the possible ‘cliff effects’ from having two models.

The Board approved the Staff recommendation with 12 members voting for and 2 against.

Discount rate

There was some discussion around the term ‘remeasurement’ used in the question.  The Board agreed that the term ‘accretion and unlocking at the current rates’ was more accurate.

Board members agreed with the staff analysis that, for the general model, the CSM is a residual that does not reflect the current value of future cash flows—because it uses the historical premium charged and not the premium the insurer would have charged at the reporting date for the same unexpired insurance coverage. This differs from direct participating contracts where the CSM calculation uses the variable fee approach, which uses the underlying assets to calculate the current value of future variable fees expected at each reporting date.

In addition, to accrete and adjust the CSM using current discount rates would result in recalculating the opening balance of CSM at each period. The staff and some Board members thought that such ‘catch up’ adjustments would introduce complexity and are hard to explain, as they do not relate to future cash flows. Some drew parallel with not remeasuring the margin under IFRS 15.  However a number of members argued that unlocking and accreting at current rates is conceptually preferable, especially given the long dated nature of the contracts and significant investment margins in the CSM. In their view, the use of the locked in rates requires historical data retention and creates a liability balance with different parts measured using different rates.

There was also a debate around which ‘current rate’, if allowed, could be used for accretion—the rate used to discount the fulfilment cash flows, or a rate that would have been the same as under a variable fee approach. The Board members were considering allowing unlocking at current discount rates as an option, but found it hard to narrow that option down or tie it to the other accounting policy choices the entity would be given under the new insurance contracts Standard. In the end they were swayed by the argument that the tentative decision on accounting policy choice for OCI presentation only affected presentation, whereas an accounting policy choice on CSM accretion/unlocking would affect measurement and change the carrying amount of the insurance contracts on the statement of financial position.

The Board approved the staff recommendation not to allow in the general model the use of current discount rates to calculate the unlocking adjustments and the accretion of time value of money on the CSM balance with 10 members voting for and 4 against.


This issue generated the most debate of the session. The Staff presented an example with four ways of viewing the effect of discretion on participating contracts that do not meet the definition of direct participation and are excluded from the application of the variable fee approach.

One view was that any cash flows lower than the original expectation, subject to minimum guarantee, were discretionary (‘view a’). ‘View ‘b was that the entity promises to pay the return on the assets it holds (less a margin) subject to a minimum guarantee. ‘View c’ was the entity promises a return based on market conditions less a margin, subject to a minimum guarantee, and therefore paying a return greater than the market (because the underlying assets’ return was higher) is discretionary. The final view was based strictly on contractual obligation, so that all cash flows above the minimum guarantee were discretionary (‘view d’).

A large part of the discussion focussed on the definitions in views ‘b’ and ‘c’. The staff recommended ‘view c’, to avoid a link to the assets held by the insurer. One Board member, while agreeing with the recommendation, wanted the entity to define at the outset how it views its expected discretionary cash flows. At the outset an entity would specify a return it expects to generate from a mix of assets. The model would then be re-run for the actual returns on that expected mix. To the extent an entity pays something different, it would have exercised discretion. Other Board members preferred ‘view b’, which was based on the performance of the assets. They argued that an insurer would typically exercise its discretion through the asset mix it holds. However, viewing the insurer’s promise of returns as based on the actual assets held would push the contract into the variable fee approach and some other Board members were not comfortable with that outcome.

Some of those Board members supporting ‘view b’ were concerned that in the staff paper example ‘view c’ still showed a CSM balance when the contract was becoming onerous. They were also concerned with the degree of variable outcomes produced by ‘view c’ when the scenario assumptions were changed. In particular, for longer duration assets when interest rates were increasing, the liability and the CSM were increasing, but insurer was not worse off, as if the underlying assets were paying variable rates.

Given all of these concerns the Board was not able to reach a decision (only 6 supported the staff recommendation) and the issue will be brought back to the December meeting.

Consequential issues arising from the variable fee approach (paper 2B)

Agenda paper summary

Extending the ability to fair value through profit or loss some assets

The Board was asked to extend the ability to fair value through profit or loss some assets that underlie the direct participating contracts, in the same way as that exception already is permitted to the unit-linked contracts.

CSM on transition

In determining the CSM on transition under the variable fee approach the entity needs to know the fair values of the assets underlying the insurance contracts at several points in time over the coverage period. In determining CSM on transition this may be difficult without the use of hindsight.

Accordingly the paper proposed a simplification as follows:

At the date of initial application an entity measures a contract using the variable fee approach as

Fair value of entity’s share of returns from underlying assets


Current estimate of remaining net costs of providing the contract


Accumulated fee for service already provided in the past by comparing the remaining coverage with the total coverage

The prior period CSM is restated by taking the CSM determined at the date of initial application and by assuming that the total fee for the contract has not changed since the beginning of the earliest period presented (i.e. effectively rolling the calculation back from the date of initial application adjusting only for the number of coverage periods remaining).

Embedded guarantees

The changes in the guarantees embedded in the insurance contract under the variable fee approach are recognised in the CSM. However, these changes can be recognised in the profit or loss, if an entity uses a stand-alone derivative that mitigates, as part of its risk management strategy, the financial market risk created by the guarantee. This strategy must be documented without the use of hindsight.

Accordingly, to avoid the use of hindsight, it is proposed that the option to recognise changes in the embedded guarantees in profit or loss under the variable fee approach can be applied only prospectively from the date of initial application of the standard.

Board discussion and tentative decisions

Extending the ability to fair value through profit or loss some assets

After a brief discussion the Board unanimously approved the Staff recommendation, given the similarities between the direct participating and unit-linked contracts.

CSM on transition

During the discussion one Board member raised a number of concerns about the simplified retrospective application approach.  Questions were raised as to whether:

  • it would take account of bonuses and distributions that had occurred since the beginning of the earliest period presented;
  • it was appropriate that only the entity’s share of the returns from underlying items should be at fair value (rather than all the underlying items); and
  • it would be clear to preparers how to estimate the restated CSM at initial recognition when simplified assumptions to restate the expected cash flows, the discount rates and the risk adjustment are used.

After some consideration of these issues the Board members agreed on the objective but asked for the wording to be revisited.

The Board members voted unanimously in favour of the staff recommendation.

Embedded guarantees

One Board member stated that it would be better if the option should be applied from the beginning of the comparative period instead of the date of initial application of the new Standard as this would aid comparability, and there was not a great risk of hindsight being used. Other Board members expressed concerns about this view, as this would be fundamentally different from the approach agreed for IFRS 9 Financial Instruments.

One Board member considered that, as insurers would know what the outcome was, this would influence their decisions on whether to apply the option or not. In response, another Board member asked whether this concern would be allayed if the designation had to be made by the date of the beginning of the comparative period. There was discussion about the need to have documentation in place (which may already exist as part of the insurers asset/liability management) to support such an approach, but the Staff noted that although the documentation may exist, insurers may choose not to adopt the option because they would know what the outcome was. Another Board member stated that in order to stop “cherry picking” an insurer would have to be required to act as if it had adopted the new Standard before it was actually adopted, but that it was hard to justify such an approach in the light of the decisions the IASB made in respect of IFRS 9.

Thirteen IASB members voted in favour of the Staff recommendation, with one member against.

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