Insurance contracts

Date recorded:

Agenda Paper summaries

There are four agenda papers prepared for the June Board meeting. Paper 2A considers the objective for the level of aggregation to be applied in measuring the contractual service margin (CSM) after initial recognition, and the guidance that should be provided on how an entity can meet that objective. Paper 2B considers whether further guidance should be given on changes in the carrying amount of the CSM for insurance contracts without direct participation features. Paper 2C considers whether the requirements for the presentation and disclosure of insurance finance income or expenses should be amended. Paper 2D considers amending the scope of the variable fee approach to exclude reinsurance contracts issued and held.

Level of aggregation for the measurement of the CSM (2A)

The Board had previously tentatively decided that the onerous contract test should be performed on a group level rather than based on an individual contract, but recognised that the accounting outcome could differ if both are deemed to be a viable application of the same objective. Because of these different results, the paper considers whether to specify that the objective for the CSM is to represent the profit for the future services to be provided for a group of contracts.  The group of contracts used for measuring the CSM should be the same as the group used for determining when contracts are onerous, and the allocation of the CSM of the group of contracts to profit or loss should reflect the expected duration and size of the contracts remaining at the end of the period.

IASB discussion

There was general agreement with removing the reference to individual contracts as many preparers had considered that the requirements should be applied to individual contracts (unless all the contracts were virtually identical), and that guidance on the level of aggregation to be applied in measuring the CSM after initial recognition is important.

One Board member did not agree with the Staff recommendation in paragraph 3(b) as this appeared to be a rule, it would be unnecessarily restrictive as the objective could be met without complying with the proposed requirement, and it would result in an unnecessarily large number of portfolios. He considered that it was unnecessary to group contracts with similar profitability in all cases, and thought that the IASB should be more relaxed about the onerous contracts test.

The Staff considered that contracts with similar profitability should be grouped together for the purposes of unlocking the CSM. They also considered that their proposal reflected the decisions made by the IASB to date, therefore any changes to the proposal may require the decisions related to unlocking to be changed. This concern was also expressed by some Board members. The Staff stated that, other than where there was no possibility of lapses, they were struggling to find circumstances in which the objective would be not be met by including the recommendation in paragraph 3(b).

Another Board member also expressed concern that the objective would result in thousands of portfolios in many cases, therefore he considered that it would be better to group contracts in a way that reflects the way in which the company manages its business. He also stated that he was not concerned about offsetting losses on some contracts against profits on other contracts if this was at a low level. Other Board members disagreed with this view as they believed that the current accounting was inappropriate as some insurers considered that it was appropriate to share profits and losses across products and across different generations of policyholders. A Board member stated that the IASB had been incredibly generous to the insurance industry compared to other industries such as banks, which were not permitted to offset losses on a loan against profits on other loans.

Several Board members stated that it is important to state what is intended by the term ‘similar profitability’ as this is open to a wide range of interpretations.

A Board member expressed concerns about whether the IASB fully understands the effects of these proposals, how operational and auditable they are, and how many units of account will result. The Staff confirmed that the proposals would result in more granularity than preparers would like. A Board member stated that there will be a lot of pushback on this, but compared it to the way that banks will be recognising credit losses as a result of the requirements of IFRS 9, which meant that better accounting will result in better business practices.


The Board approved by 11 votes for and 3 votes against the Staff recommendation.

Changes in the carrying amount of the CSM for insurance contracts without direct participation features (2B)

This paper considers whether further guidance should be provided on changes in the carrying amount of the CSM for insurance contracts without direct participation features, i.e. under the general model. This would provide a clear common understanding of the changes in the fulfilment cash flows that relate to future service, and hence adjust the CSM, and the changes that relate to current and past service, and hence do not adjust the CSM.

IASB discussion

One Board member suggested minor revisions in the proposed wording, which the Staff agreed to consider.

Another Board member did not agree with the wording of the proposal, as he considered that when an event occurred in the current period that resulted in changes to the estimate of cash flows, this would result in too much of this change in estimates being reflected in the future (by adjusting the CSM) and too little in the current period.

The Staff agreed that greater clarity was required by what was meant by an ‘incurred claim’ and they will change the wording in respect of experience adjustments to make the intention clearer.


The Board approved by 12 votes for and 2 votes against the Staff recommendation.

Presentation and disclosure of insurance finance income or expenses (2C)

This paper considers three aspects of insurance finance income or expenses, which is described as the change in the effect of the time value of money arising from the passage of time and the effect of changes in financial assumptions. This includes changes in the present value of the future cash flows, the risk adjustment and the CSM.

The first aspect is whether an entity should be required to disaggregate a change in the risk adjustment to present a financial component and an underwriting component. It is not feasible to require entities to identify the effect of a change in discount rate on the risk adjustment given the different techniques that are available for measuring the risk adjustment. Consequently, the paper proposes that an entity need not disaggregate the change in the risk adjustment to present a finance component and an underwriting component, and if the entity does not make such a disaggregation, it should present the entire change in the risk adjustment as part of the underwriting result.

The second aspect is how the presentation in profit or loss (P&L) and other comprehensive income (OCI) should be presented. The Board had previously tentatively decided that insurance finance income or expense should be presented in P&L using a cost measurement basis, which in this context is a systematic allocation over the life of the contract. The examples of cost allocation on a systematic basis given in a previous Board paper are not all consistent with the use of the term ‘cost’ in other Standards. The paper proposes that the reference to a cost measurement basis as the objective of presenting insurance finance income or expense in P&L should be removed, and instead alternative guidance on what a systematic allocation is should be provided. This would be based on the characteristics of the contract without reference to factors that do not affect its measurement, and results in the amounts recognised in OCI over the life of the contract totalling zero. Further guidance would also be provided such that where changes in financial assumptions do not have a material effect on the amounts paid to the policyholder, the systematic allocation would be determined using the discount rate(s) applicable at inception of the contract, and where they do have a substantial effect, a systematic allocation could be determined in different ways with examples provided.

The third aspect addresses the disclosures required to explain the amount of insurance finance income or expense in a period. The paper considers the removal of the requirement to disclose a specified breakdown of total insurance finance income or expense. This would be replaced by the inclusion of a requirement to explain the total amount of insurance finance income or expense in a reporting period, combined with requirements to highlight the relationship with the investment return on the related assets, and to explain the methods used to calculate the information presented in P&L.

IASB discussion

There was general agreement with the proposals, subject to minor suggestions for improving the wording.


The Board unanimously approved the first two Staff recommendation, and approved by 13 votes for and 1 vote against the third Staff recommendation.

Reinsurance contracts issued and held and the scope of the variable fee approach (2D)

The variable fee approach (VFA) was developed to address situations in which the policyholder pays a premium and expects to receive both insurance coverage and investment returns in excess of the premiums paid. In contrast, in a reinsurance contract the cedant pays a premium but does not generally expect reimbursement greater than the premium paid, and the reinsurer does not provide a cedant with a return on underlying items and keep a proportion for itself as a fee. The profit the reinsurer earns is not a fee for providing investment management services, but is earned from providing reinsurance coverage. Consequently this paper asks the Board to amend the scope of the VFA to exclude reinsurance contracts that a reinsurer issues or a cedant holds. 

IASB discussion

There was no discussion about this issue.

Tentative decision

The Board unanimously approved the Staff recommendation.

Next steps

The staff are in the process of addressing Board Member comments on the working draft. After this meeting the staff expects to reflect the tentative decisions from this meeting in a revised draft, to ask selected external parties to provide input on how selected sections of the revised draft would be applied, and discuss any further sweep issues that arise from field testing and from the continued drafting process.

The staff expect to ask the Board to set a mandatory effective date for the new insurance contracts Standard in the 3rd quarter of 2016.

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