IASB Insurance Project – Update Note No 4. July 2010 from Peter Wright and Nick Dexter
The IASB and FASB considered the insurance project at five board meetings over May and June but
were still unable to meet the June deadline for publication of the exposure draft. This is now expected
in late July. Final rules on unbundling are still awaited; the board is due to discuss what are called
“sweep issues” on 19 and 22 July.
The more important decisions reached in May and June were as follows:
Margins
The IASB narrowly decided to retain separate risk and residual margins whilst the FASB narrowly
decided to retain one composite margin. The objective of a separate risk margin was agreed to be to
reflect the maximum amount that an insurer would rationally pay to be relieved of the risk and it was
concluded that the margin must be assessed in one of three ways, namely a confidence interval,
conditional tail expectation or cost of capital approach.
Risk margins are to be assessed at the level of a portfolio of contracts using the IFRS 4 definition of
“contracts that are subject to broadly similar risks and managed together as a single portfolio”.
Residual (and composite) margins are to be determined at a cohort level of aggregation within each
portfolio.
Cash flows
It was concluded that the measurement of a portfolio of insurance contracts should include the
expected present value of the incremental cash flows arising from that portfolio. Hence general
overhead expenses will be excluded. Guidance will be provided on how to distinguish expenses to be
included or excluded in this calculation.
The FASB agreed that incremental acquisition costs should feature in the calculation of the value of a
contract’s cash flows and hence would be brought into account when calculating the composite
margin (the difference between the first premium and the liability at issue). An important difference
between the IASB and FASB approaches is thereby removed.
Transitional arrangements
Insurance liabilities for business in-force at the opening of the earliest period presented would be
restated using (for long duration contracts) the new building block approach but excluding any
residual margin. As a consequence any DAC asset and acquired in-force value, which represent overstatements in insurance liabilities calculated using the IFRS 4 approach, will be written off.
An insurer will be able to re-designate financial assets as measured at fair value through profit or loss
at the start of the earliest period presented, if doing so would eliminate or significantly reduce an
inconsistency in measurement or recognition.
The arrangements will also be available to first time adopters of IFRS.
Participating business
The IASB concluded that participating investment contracts which share a common pool of assets
with participating insurance contracts should come within the scope of the insurance standard. The
FASB did not agree with this conclusion.
The FASB has however, accepted that the cash flows for participating insurance contracts should
include those in respect of expected future policyholder bonuses
It still seems unlikely that any free estate in a with-profits fund will be split between
shareholder/policyholder elements.
Business combinations
The boards concluded that liabilities for insurance contracts assumed in a business combination
should be measured at the higher of fair value and the amount determined in the normal way but
excluding any residual margin (composite margin in the case of FASB). It was recognised that this
exception to the general rules of IFRS 3 and the equivalent U.S. GAAP standard would increase the
carrying amount of goodwill in cases where the second liability value described above was higher
than fair value.
Reinsurance
The boards concluded that cedants should measure the reassurance asset based on the following
three building blocks:
 The expected present value of the cash flows required to fulfil the reinsured portion of the
insurer’s obligations less an allowance for the reinsurer’s non-performance.
 The risk margin included in the measurement of the reinsured portion of the contract liability.
 A residual margin (not less than zero) to ensure that the initial asset is equal to the premium paid
less any ceding commission received.
If the reinsurance premium paid less ceding commission received is less than the sum of the first two
building blocks then the difference is recognised as a gain in profit or loss at the initial recognition of
the reinsurance contract.
Presentation
The boards concluded that an insurer should present the income statement using a margin approach
rather than a traditional revenue account. The following items should be shown:
 The change in the risk adjustment and release of the residual margin.
 The difference between actual and expected cash flows.
 Changes in estimates.
 Interest on the insurance liability presented in such a way as to highlight the relationship with the
investment return on backing assets.
Premiums, claims and expenses would be disclosed separately.