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Insurance contracts

Date recorded:

The staff will be asking the Board for per­mis­sion to begin the balloting process: Agenda Paper 2A summarises the back­ground and context of the IASB’s project on insurance contracts; Agenda Paper 2B provides a high level overview of the Board’s model for insurance contracts based on the decisions to date; Agenda Paper 2C provides an overview of the ways in which the Board has addressed the comments received on the 2013 Exposure Draft; Agenda Paper 2D summarises the changes to the accounting treatment for the insurance contracts over the Board’s previous three due process documents, the tentative decisions to date, and a high level summary of the responses to these due process documents; Agenda Paper 2E sets out the staff’s view on why the Board need not re-expose the new insurance contracts Standard; and Agenda paper 2F summarises the due process steps un­der­taken through­out the project and asks the Board if it is satisfied that all the mandatory due process steps have been met in de­vel­op­ing the new insurance contracts Standard, requests per­mis­sion to begin the balloting process and asks whether any Board member intends to dissent from the pub­li­ca­tion of the new insurance contracts Standard.

In essence, the Board will need to decide whether to grant per­mis­sion to begin the balloting process or whether it considers that it needs to re-expose the new insurance contracts Standard.

Board discussion and decisions

The Board met on the 16 February to discuss the due process steps taken to date, decide on whether the project is at the stage ready for ballot and to discuss Board members’ final concerns before drafting. Majority of the Board members congratulated the Staff on their hard work in getting the insurance project to this final stage. The meeting started with a discussion of the project and any drafting concerns before proceeding to voting. On each of the three questions the members unanimously agreed: 1) that the necessary due process steps have been met; 2) the Board permission to the Staff to begin the balloting process had been granted; and 3) no members were planning to dissent from the Standard. 

During the discussion, a number of IASB members raised the possibility of a need to conduct some further outreach activities to discuss constituent concerns, to enhance the understanding of application issues and to check how the words used in the drafting would be interpreted. Other Board members cautioned against a too wide outreach. They suggested a combination of an outreach to a broader audience on a few selective issues and broader exposure to a small group of people. 

In particular, one of the new areas of the standard would be the variable fee approach that was not previously exposed. The Staff suggested that they plan to do a summary paper inviting comment. Some members asked for more examples in order to reduce diversity in practice. The three areas in particular that in some members’ view would benefit from more guidance were:

  1. Use of OCI for indirect participating contracts
  2. Amortisation of the CSM over the contract life
  3. Allocation of CSM in the case of contract lapses

A parallel was drawn with IFRS 15 which has fifty examples, compared to twelve in the Insurance ED. The Staff explained that the examples in the ED are designed to illustrate one point at a time. They are not comprehensive, and care needs to be taken not to extrapolate more meaning from them than intended. This may be leading to unintended consequences. There was also weariness of ‘drawing unintentional bright lines’ by using the examples in interpreting such concepts as ‘similar contracts’.

For example, in a case of straight line CSM amortisation the Staff argued that the principle expressed in the standard is important and that is why the detailed guidance it is left deliberately unspecified. One Board member asked for more ‘road-testing’ of this model. Other members asked that if any ‘road-testing’ is to be done, it has to be on a particular example only with an ability to interrogate the feedback in order to understand what examples would be useful. It was clarified that any ‘road-testing’ would be not of the model itself instead it would be designed to operate as a quality control around the words used in drafting and how they may be interpreted.

Finally, one Board member proposed to remove the reference to the ‘OCI solution’ as the preferred approach, when compared to presenting all the changes in the discount rate in the profit or loss. This was also echoed by the Chairman asking for a redrafting of this point. In his view, managing of the discount rate is an integral part of the insurer’s business and while the Board allowed an OCI solution, he hoped that several insurance companies would show the discount rate’s impact in the profit and loss. The Chairman also commented on the ‘variable fee approach’ that no answer was perfect. However, he acknowledged that, while the variable fee approach decision was needed in order to finish the project, in his view, it reflected real economic volatility. He noted that many insurers currently hedge this volatility using derivatives and that it should be reflected in the profit or loss.

The Board members wished the Staff to continue with their hard work on the drafting of the final text of the new standard so that it can be completed within the targeted nine months period. The Staff assured the Board that they will do so and that they will keep the constituents up to date on their process via summary papers and various proposed targeted consultation activities.

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