Comments of IRDA on Exposure Draft on Insurance Contracts (IFRS4)
Question No.
Question 1 – Relevant information for users : Do
you think that the proposed measurement model
will produce relevant information that will help users
of an insurer’s financial statements to make
economic decisions? Why or why not? If not, what
changes do you recommend and why?
2. Question 2 – Fulfillment cash flows
(a) Do you agree that the measurement of an
insurance contract should include the expected
present value of the future cash outflows less future
cash inflows that will arise as the insurer fulfils the
insurance contract? Why or why not? If not, what
do you recommend and why?
2 (b) Is the draft application guidance in Appendix
B on estimates of future cash flows at the right level
of detail? Do you have any comments on the
guidance?
Question 3 – Discount rate : (a) Do you agree
that the discount rate used by the insurer for nonparticipating
contracts
should
reflect
the
characteristics of the insurance contract liability and
not those of the assets backing that liability? Why
or why not?
3(b) Do you agree with the proposal to consider the
effect of liquidity and with the guidance on liquidity?
Why or why not?
In the views of IRDA
No, it is unlikely that economic decisions are based solely on the accounting representation, whether current or
proposed. The key items that are likely to be overlaid with the financial statements in making economic decisions by
the management or shareholders under the proposals are
Expected returns from investments as opposed to just the risk free expectation under the proposed standards
Hence, we feel that two model approach one each for life and non-life may be considered in view of different nature of
liability.
We support the views of IAIS on this issue. We further add that we would however distinguish between the expected
present value of future cash flows, as described in Paragraph 17, and the present value of expected cash flows.
However, the usefulness of such an approach in relation to non-hedgeable risks would be debateable, e.g. no plausible
stochastic model in existence has proven capable of predicting observed longevity improvements in the developed
economies. Also, a stochastic model of, for example, policyholder persistency, is liable to be specious. It is challenging
in many such circumstances to predict the mean, let alone the entire distribution. In the context that fitting
distributions to some of these parameters may not be possible, the standard would require that probabilities be
assigned to each outcome, which would be an extremely subjective assessment that could result in significant
inconsistencies across companies
The Insurers, in no case, should be allowed to reduce their liabilities on the basis of insurer’s own credit rating.
We agree. However, further guidance from IASB would be welcome regarding the determination of discount rate.
We agree that illiquidity is a characteristic of most of insurance contracts where they are traded. In many jurisdictions
of emerging markets including India, insurer contracts are not traded.
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Question No.
In the views of IRDA
3(c) Some have expressed concerns that the
proposed discount rate may misrepresent the
economic substance of some long-duration
insurance contracts. Are those concerns valid?
Why or why not? If they are valid, what approach
do you suggest and why? For example, should the
Board reconsider its conclusion that the present
value of the fulfillment cash flows should not reflect
the risk of non-performance by the insurer?
Risk of non-performance should not be reconsidered. Allowing for the risk of non-performance would in effect depress
liabilities for weak companies. The concerns that the MC approach may misrepresent the economic substance of a
contract are valid.
 The liabilities are not liquid. To use theory applicable to liquid markets, which is implicit in the choice of market
parameters, is in principle inappropriate. Further, where there is little or no prospect of a liquid market’s
development, the exercise appears futile.
 Liabilities are not marked to market in this approach; they are marked to model.
 Liabilities are long-term and today’s market price is not relevant unless the liability is traded.
 To mark options and guarantees to market can have untoward macroeconomic effects, e.g. where there is an
embedded put option in the liabilities, as in UK-style with profits business, mark to market will encourage a
matching asset strategy, including implicit or explicit delta hedging. This will result in insurance funds’ shorting of a
risky asset as it falls and vice versa. This will increase market volatility, which is undesirable.
 The group recognized that for contracts with DPF, the valuation rate may reflect actual assets held. But it would
appear that embedded derivatives would still be valued as a replicating portfolio. In fact, given BC97, the asset
share should also be valued as a replicating portfolio. So the purpose of exempting business with DPF from a
valuation rate independent of the backing assets is unclear.
Question 4 – Risk adjustment versus composite
margin : Do you support using a risk adjustment
and a residual margin (as the IASB proposes), or
do you prefer a single composite margin (as the
FASB favours)? Please explain the reason(s) for
your view.
Question 5 – Risk adjustment: (a) Do you agree
that the risk adjustment should depict the maximum
amount the insurer would rationally pay to be
relieved of the risk that the ultimate fulfillment cash
flows exceed those expected? Why or why not? If
not, what alternatives do you suggest and why?
We support that a single Composite Margin Approach.
5 (b) Paragraph B73 limits the choice of techniques
for estimating risk adjustments to the confidence
level, conditional tail expectation (CTE) and cost of
capital techniques. Do you agree that these three
We do not agree. The characteristics of the risk adjustment set out in B72 are adequate and that any technique that
provides an appropriate estimate of the risk adjustment with these characteristics should be permitted. There may be
known characteristics of the cash flows and therefore the uncertainty surrounding them that would not be captured by
the three stated techniques
No, we don’t agree. This will be impossible to calibrate since liabilities are not traded on a liquid market. Specifying a
method does not help in this regard since, for example, the tail of the distribution used for estimating the conditional
tail expectation (CTE) may vary among companies even if the methods are identical. Also, guidance is required over
how to assess and project the required capital if a cost of capital approach is taken.
In addition to guidance from IASB, prescription of the models used and the key parameters, perhaps by the local
regulator, would be required. In the absence of such prescription, inconsistency would result.
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Question No.
techniques should be allowed, and no others? Why
or why not? If not, what do you suggest and why?
5(c) Do you agree that if either the CTE or the cost
of capital method is used, the insurer should
disclose the confidence level to which the risk
adjustment corresponds (see paragraph 90(b)(i))?
Why or why not?
5(d) Do you agree that an insurer should measure
the risk adjustment at a portfolio level of
aggregation (ie a group of contracts that are
subject to similar risks and managed together as a
pool)? Why or why not? If not, what alternative do
you recommend and why?
5(e) Is the application guidance in Appendix B on
risk adjustments at the right level of detail? Do you
have any comments on the guidance?
Question 6 – Residual/composite margin -(a) Do
you agree that an insurer should not recognize any
gain at initial recognition of an insurance contract
(such a gain arises when the expected present
value of the future cash outflows plus the risk
adjustment is less than the expected present value
of the future cash inflows)? Why or why not?
6(b) Do you agree that the residual margin should
not be less than zero, so that a loss at initial
recognition of an insurance contract would be
recognised immediately in profit or loss (such a
In the views of IRDA
It is, in isolation, a meaningless number since the confidence interval for any such extreme percentile of any of the
significant random variables will be very wide.
It is therefore preferable for the insurer to disclose fully how it has established that it has estimated the risk adjustment
appropriately including disclosure of the techniques, parameters and assumptions applied and not to be required to reexpress the result in terms of a technique that it has not used. Moreover, translating a CTE or CoC measurement to a
confidence level is probably onerous in practice, and confidence levels from different insurers may not be comparable.
This may lead to convergence towards the use of the confidence level rather than application of risk adjustments that
are useful for economic decision making. B92 refers to the selection of the most appropriate technique depending on
the nature of the insurance contract. The Group recommends that estimation of the risk adjustments using appropriate
techniques which give results that possess the characteristics in B72 should be the aim rather than trying to establish
the most appropriate technique.
We agree.
We do not agree as it is far too detailed regarding the three permitted techniques whereas in our view it should really
concentrate on ensuring that whatever technique is used meets the characteristics listed in paragraph B72.
Yes, it is reasonable to require that profits are recognized over the term of the contract.
Yes, we agree that the residual/ Composite margin should have a floor of zero. This would appear consistent with
normal accounting concepts of prudence.
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Question No.
loss arises when the expected present value of the
future cash outflows plus the risk adjustment is
more than the expected present value of future
cash inflows)? Why or why not?
6(c) Do you agree that an insurer should estimate
the residual or composite margin at a level that
aggregates insurance contracts into a portfolio of
insurance contracts and, within a portfolio, by
similar date of inception of the contract and by
similar coverage period? Why or why not? If not,
what do you recommend and why?
6 (d) Do you agree with the proposed method(s) of
releasing the residual margin? Why or why not? If
not, what do you suggest and why (see paragraphs
50 and BC125–BC129)?
6(e) Do you agree with the proposed method(s) of
releasing the composite margin, if the Board
were to adopt the approach that includes such a
margin (see the Appendix to the Basis for
Conclusions)? Why or why not?
6(f) Do you agree that interest should be accreted
on the residual margin (see paragraphs 51 and
BC131–BC133)? Why or why not? Would you
reach the same conclusion for the composite
margin? Why or why not?
Question 7 – Acquisition costs
(a) Do you agree that incremental acquisition costs
for contracts issued should be included in the initial
measurement of the insurance contract as contract
cash outflows and that all other acquisition costs
should be recognised as expenses when incurred?
Why or why not? If not, what do you recommend
and why?
Question 8 – Premium allocation approach
In the views of IRDA
Yes. Calculations at a portfolio level make more sense in a business that largely depends on the law of large numbers i.e. there should be a degree of averaging between the individual contracts in a portfolio for the purposes of
determining the residual margin.
No. We do not support the purposed method of releasing of the residual margin as Paragraph 50(b) of the Exposure
Draft refers only to expected claims and benefits. We strongly believe that release of margin must not produce paper
profit and hence there should be real profit / cash flow. Hence, margin should be released for those contracts which go
out of the books.
Yes, as multiple methods may be more appropriate. For example, a constant yield to cash flows seems a simpler
method, and since the cash flows should be updated on current basis.
No comments as we believe composite margin approach.
Yes, Incremental acquisition costs are to be included in the fulfillment cash flows. Hence, they will serve to reduce the
residual margin.
We agree that the approach be permitted but not required. Requiring the use of this simplified method for short-
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Question No.
In the views of IRDA
(a) Should the Board (i) require, (ii) permit but not
require, or (iii) not introduce a modified
measurement approach for the pre-claims liabilities
of some short-duration insurance contracts? Why
or why not?
8(b) Do you agree with the proposed criteria for
requiring that approach and with how to apply that
approach? Why or why not? If not, what do you
suggest and why?
Question 9 – Contract boundary principle
Do you agree with the proposed boundary principle
and do you think insurers would be able to apply it
consistently in practice? Why or why not? If not,
what would you recommend and why?
Question 10 – Participating features (a) Do you
agree that the measurement of insurance contracts
should include participating benefits on an
expected present value basis? Why or why not? If
not, what do you recommend and why?
10(b)
Should
financial
instruments
with
discretionary participation features be within the
scope of the IFRS on insurance contracts, or within
the scope of the IASB’s financial instruments
standards? Why?
10(c) Do you agree with the proposed definition of
a discretionary participation feature, including the
proposed new condition that the investment
contracts must participate with insurance contracts
in the same pool of assets, company, fund or other
entity? Why or why not? If not, what do you
recommend and why?
Question 11 – Definition and scope
(a) Do you agree with the definition of an insurance
contract and related guidance, including the two
duration insurance contracts may enhance comparability among insurers with only short-duration insurance contracts,
but may conversely reduce comparability among insurers having otherwise similar portfolios but with different
durations.
The term pre-claim liability is misleading. It could be renamed as “unearned premiums” as is referenced in para BC145
of Basis of Conclusion
We broadly agreed that the principle is reasonable. Although it is not clear if voluntary contributions would be included
within the contract boundary. We feel that this should be allowed and be part of existing contract.
Yes, we agree.
We agree that financial instruments with discretionary participation features should be within the scope of the IFRS on
insurance contracts as they are within the scope of the current IFRS 4 and that does not appear to have caused any
issues in practice.
No, as a consequence of BC 201, where there is a regulatory requirement to separate business with discretionary
participation feature (DPF) into two funds, one for pensions which would not have significant insurance risk, and one for
life insurance which would have significant insurance risk, group understands that the pensions business would not be
treated under IFRS 4. We do not agree with this proposal.
We agree with the definition.
Further the obligation should be accounted on commencement of the risk only and not on receipt of the premium.
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Question No.
changes summarised in paragraph BC191? If not,
why not?
11(b) Do you agree with the scope exclusions in
paragraph 4? Why or why not? If not, what do you
propose and why?
11(c) Do you agree that the contracts currently
defined in IFRSs as financial guarantee contracts
should be brought within the scope of the IFRS on
insurance contracts? Why or why not?
Question 12 – Unbundling
Do you think it is appropriate to unbundle some
components of an insurance contract? Do you
agree with the proposed criteria for when this is
required? Why or why not? If not, what alternative
do you recommend and why?
Question 13 – Presentation: (a) Will the proposed
summarized margin presentation be useful to users
of financial statements? Why or why not? If not,
what would you recommend and why?
Question 14 – Disclosures: (a) Do you agree with
the proposed disclosure principle? Why or why
not? If not, what would you recommend, and why?
Question 15 – Unit-linked contracts: Do you
agree with the proposals on unit-linked contracts?
Why or why not? If not what do you recommend
and why?
Question 16 – Reinsurance (a) Do you support an
expected loss model for reinsurance assets? Why
or why not? If not, what do you recommend and
why?
16(b) Do you have any other comments on the
reinsurance proposals?
In the views of IRDA
Yes, we agree.
We agree that financial guarantee contracts written by insurance companies be within the scope of IFRS 4.
As per the definition about unbundling, requirement would be attracted for those insurance contracts which have
investment component or a service component. Currently in India Unit Linked Products and Pension products contain
both insurance and investment feature. However, the exposure draft provides that an insurer shall not unbundle
components of a contract that are closely related to the insurance coverage specified in the insurance contract.
We feel that “closely related to the insurance coverage” is a vague term. We feel that unbundling should not be
permitted if the insurer's recognizes all obligations trough the currency of contract.
We feel that the presentation, while illuminating to experts, will prove extremely difficult to understand for most users.
There is an expectation of and familiarity with items such as premiums, expenses, claims, etc. in the financial
statements. The absence of such items will require extensive explanation and substantial supplementary disclosure.
Further such outputs typically arise from actuarial, not accounting, models. For these to form primary reporting will
require significant re-engineering of accounting and actuarial processes and software.
There should be a separate disclosure requirement for Asset Liability Matching (ALM) and Non-Performance Assets
(NPAs).
No, the Unit linked contract should be allowed to be valued either at fair value or at market value since in emerging
markets, it will be difficult to arrive at fair value.
Yes, we agree.
The measurement of reinsurance assets should be on the same basis as used for underlying direct insurance contract.
If the underlying direct insurance contracts are capable of being measured under the premium allocation approach
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Question No.
In the views of IRDA
then a reinsurance asset should be capable of being measured in the same manner.
Question 17 – Transition and effective date
(a) Do you agree with the proposed transition
requirements? Why or why not? If not, what would
you recommend and why?
17(b) If the Board were to adopt the composite
margin approach favoured by the FASB, would you
agree with the FASB’s tentative decision on
transition (see the appendix to the Basis for
Conclusions)?
17(c) Is it necessary for the effective date of the
IFRS on insurance contracts to be aligned with that
of IFRS 9? Why or why not?
17(d) Please provide an estimate of how long
insurers would require to adopt the proposed
requirements.
Question 19 – Benefits and costs
Do you agree with the Board’s assessment of the
benefits and costs of the proposed accounting for
insurance contracts? Why or why not? If feasible,
please estimate the benefits and costs associated
with the proposals.
We further note that the effect of the proposals on the ceding company would be to recognize a profit on inception of
reinsurance where the contract is expected to be profitable, but to defer recognition of the loss where it is expected to
be loss-making. We strongly oppose to this approach and recommend that loss should be recognized immediately and
the profit should be recognized over the period of the contract.
We did not support the proposed transition arrangements. They would result in an enormous acceleration of the
emergence of surplus: expected future profits at the point of transition would be transferred to equity. Subsequently, for
several years, profit flow would be depressed as only variances from expectations in respect of this book would emerge.
Thus, the profit flow even for a stable-state company would be extremely volatile.
We recommend instead that as a one-off calculation, the residual margin of the existing business at point of transition
be estimated, as if the standard had been in force since inception of the business, and that this be held as a liability.
Alternatively, the expected future profits immediately before the point of transition may be estimated, held as a
residual margin and amortized in line with the expected emergence of those profits.
We suggest that the effective date for IFRS 9 and for insurance contracts must be aligned for insurers. The likely
different adoption dates could lead to accounting mismatch issues or the need to change accounting methodologies in
close succession unless a practical transition is granted to insurers.
We feel that once, this ED is notified as IAS, insurers will need a minimum two years time to adopt the proposed
requirement
Not commented by group as it is too subjective at this stage.
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