Current IASB Position
Contracts with Participating
FeaturesContracts:
Measurement of the Insurance
Contract Liability
Definition participating features
A participation feature is a mechanism by which the entity shares the
rewards and risk with the policyholder through payments that are
additional to payments that are commensurate with the loss suffered
on the occurrence of the insured event. Those additional payments to
the policyholders may be affected by changes in market variables.
Measurement of the Insurance Contract Liability
(Ignoring Presentation)
• All contracts (Life, non-life, par, non-par) at fulfilment value applying the
three building blocks, except
• Separated components (distinct components, investment, service or derivative)
• Replicating portfolio applies (Cash /Flow exactly equal to instruments traded in
market, e.g. in case of unit-linked contracts [I DO NOT THINK THIS STATEMENT IS
CORRECT FOR UNIT LINKED CONTRACTS])
• Unearned premium approach (as a simplification of the building block approach
for short duration policies)
• Direct participating contracts (whether we call this a separate measurement
model, difference in the Contractual Service Margin)
First Building Block: (Risk-neutral) Expected Value of Future Cash
Flows
• Estimate of the current expected value of future cash flows,
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as expected to incur at the reporting entity in fulfilling the obligation
as expected/estimated by the preparer
reflecting all possible future scenarios
risk-neutral (stochastic mean value of cash flows) WE COULD TALK ABOUT WHAT INTEREST RATE
ASSUMPTIONS SHALL BE USED IN CASE FUTURE CASH FLOWS DEPEND ON INVESTMENT
RETURNS; not necessarily risk-neutral, as long as entire calculation is market-consistent
• In practice, usually a set of market-consistent risk-neutral scenarios, where volatility of market
parameters reflects market views
• not in contradiction to views of market participants about expected values as derived directly
from observed market prices (objectivity precedence)
• Includes c/f cash flows under the contract from any
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minimum guarantee
assymmetries (cash flows that depend asymmetrically / non-linearly on future asset development)
non-separated embedded derivative
p/hs‘ policyholder behavior
obligation under the contract to refund its surplus of the contract to the collective portfolio of policies today
or in future (as well any effect of allocation to individual policyholders if within the current contract
boundary, i.e. insurer currently obliged to provide coverage from allocation etc.)
• future benefit at the future discretion of the insurer to the contract if within contract boundary
Second Building Block: Time Value of Money
• Discounting of c/f cash flows in determining the expected value,
• applying the time value of money as required by market participants (not entity-specific)
• market consistent (rates shall be consistent with observable current market prices for
instruments with cash flows whose characteristics are consistent with those of the
insurance contract, in terms of, for example, timing, currency and liquidity)
• in practice, usually a market rate risk free curve
• no double counting of c/f cash flows characteristics, i.e. ignoring any deviation risk of
amount or timing (as considered in expected value and risk adjustment), typically the
time value of money as charged for a deterministic c/f (risk-free illiquid)
• In practice, in case a risk free curve is applied, the discount rate curve applies equally to
all cash flows in all scenariosc/f, including any
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minimum guarantee
asymmetry
non-separated embedded derivative
p/hs‘ policyholders behavior
obligation under the contract to refund surplus of the contract to the collective today or in future
(as well any effect of allocation to individual p/hs‘ policyholders if within the current contract
boundary, i.e. insurer currently obliged to provide coverage from allocation etc.)
• future benefit at the future discretion of the insurer to the contract if within contract boundary
Third Building Block: Risk Adjustment
• Value of the deviation risk of amount or timing of c/f cash flows
• as associated subjectively by the reporting entity (except in case of replicating
portfolio, there the market participants view as directly observed in market)
• as affecting ultimately the (owner of the) reporting entity
• excluding any deviation risk re-transferred to p/hs‘ policyholders via par feature
• including any deviation risk
• retained by par feature (deviations of insurer’s share due to changes in u/i) WHAT DO YOU MEAN
BY u/i?
• created by par feature (deviations due to changes in the percentage of insurer’s share)
• due to management’s future discretion (e.g. in response to competitive pressure) ????????? (the
risks which can be hedged or avoided are not included)
• resulting from any c/f cash flows including: any
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minimum guarantee
asymmetry
non-separated embedded derivative
p/hs‘ policyholders behavior
Contractual Service Margin CSM
• Liability for the remaining coverage of profitable contract includes a
Contractual Services Margin
• Determined at outset absorbing any initial profit
• Released evenly over the coverage period with accretion of interest
• Adjusted for (as long as remaining positive)
• changes in the (estimated) expected value of future c/f cash flows as far as reflecting
future services
• changes in the (estimated) risk adjustment that relate to future coverage and other
services for deviation risks to be born in future (not all changes + overstroked the over
stroked text which is not needed even though it is a fact)
• and, as sole measurement peculiarity of direct participating contracts, changes of
insurer’s share in the u/i, except those hedged
• excluding effects of changes in discount rate and changes of c/f cash flows due to
changes in market variables (i.e. variables with a directly observable market price) since
that is not assumed to reflect future services (except if part of u/i for direct par contracts)
Open Measurement Issues for Direct Participating Contracts
Sharing p/hs‘ policyholders in the Surplus of the Insurer
• How to measure the obligation to refund p/h policyholders a share of the surplus?
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At the expected share applied to the IFRS carrying amount of the surplus?
At the expected share applied to the fair value of the surplus?
At the expected share applied to the expected value of the surplus?
At the amount of expected bonuses as expected to be paid to current and future p/hs‘ policyholders from the
surplus of the contract?
• How to measure insurer’s share in the surplus to adjust the Contractual Services Margin?
• At the expected share applied to the IFRS carrying amount of the surplus?
• At the expected share applied to the fair value of the surplus?
• At the expected share applied to the expected value of the surplus?
• The Contractual Services Margin at initial recognition of contract A includes insurer’s share in the
surplus from contract A. p/hs‘ Policyholders share is allocated later to current or future contracts,
often by means of provision of additional services, generating again surplus. Is insurer’s share in that
latter surplus (arising often under other contracts) as well as anticipated at initial recognition of
contract A or is it beyond the contract boundary of contract A?
Direct Participating Contract
• the contractual terms specify that the policyholder participates in a
defined share of a clearly identified pool of underlying items;
• the entity expects to pay to the policyholder an amount equal to a
substantial share of the returns from the underlying items; and
• a substantial proportion of the cash flows that the entity expects to pay
to the policyholder should be expected to vary with the cash flows from
the underlying items