Deloitte comments to IASB on insurance contracts

  • Deloitte Comment Letter Image

23 Nov 2007

We have submitted to the IASB our Comments on the Discussion Paper 'Preliminary Views on Insurance Contracts'.

The IASB issued the Discussion Paper (DP) for comment on 3 May 2007. We generally agree with the DP's main proposal that insurance liabilities should be measured at a current value, on the basis of the 'three building blocks'. However, in looking at the detailed approach outlined in the DP, we express a number of comments and concerns, including the following:
  • Use of market-based data. We agree with an overall principle that all assumptions used should be market consistent, but only to the extent that references to market data are effectively available and relevant to include in the measurement of an insurance liability. If this not the case, the final Standard on insurance contracts should clearly state that an insurer will use 'portfolio-specific' data if available, and otherwise its own entity-specific data, to the extent that market participants would have included this type of data into the measurement of an insurance liability.
  • Risk margins and service margins. We believe that the DP fails to provide a clear view of what are the risk and service margins. In addition, the DP fails to discuss properly the nature of insurance contracts and whether analogies should be made with service contracts.
  • Day-one gains and losses. Once insurance liabilities have been determined using the 'three building blocks' (and taking into account our comments), a proper estimate of the performance obligations associated with the insurance contracts will have been performed. Accordingly, we agree that it is appropriate to recognise in profit or loss any difference that arises at inception of insurance contracts between the measurement obtained (less relevant acquisition costs) and the premiums received.
  • Labelling of the measurement attribute for insurance liabilities. We disagree with labelling the measurement attribute for insurance liabilities as a 'current exit value'. We do not believe that that term appropriately portrays what the goal of the measurement should be, or that there should be a reference to a transfer value. Insurers cannot transfer their insurance liabilities to third parties freely and would generally not wish to do so. ...The usual way of settling an insurance liability is for an insurer to continue to fulfil its commitments until the obligation is extinguished.
  • Unit of account. We consider it important that the final Standard on insurance contracts specifies clearly that the unit of account for estimating both expected future cash flows and the risk margin is the portfolio of insurance contracts.
  • Estimates of future cash flows: policyholders' behaviour and participation. Consideration of policyholders' behaviour is a reality of insurance activities. We support an overall objective for the final Standard on insurance contracts that is to provide relevant information to the users of the financial statements, enabling them to predict the cash flows relating to insurance contracts that will flow to and from the reporting entity.
  • Consistency of the requirements for insurance contracts with other Standards. We pursuing the efforts undertaken so as to produce proposals for insurance contracts – in the not too distant future – that result in sound and relevant financial information for those contracts, enabling the users of the financial statements to better predict the future cash flows that will flow to, or from, the reporting entity. If a treatment is considered to best meet the objective that we indicate, but would create an inconsistency with other parts of the IFRS literature, we do not consider that this treatment should be rejected outright.
Click for our letter of comment.  You will find all past Deloitte letters of comment to the IASB and the IASC Here.


Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.