07 January 2014

EFRAG: Feedback statement on the IASB's revised ED, Insurance Contracts

Most of the constituents supported the IASB proposal to adjust the contractual service margin for differences between the current and previous estimates of cash flows that relate to future coverage or services.

Most of the constituents agreed with EFRAG that the contractual service margin should be adjusted for changes in the risk adjustment that relate to future services.

Some constituents asked for clarification of the treatment of options and guarantees embedded in insurance contracts.

Some constituents believed that the contractual service margin should be released over the coverage and settlement period rather than over just the coverage period as, in their view, the obligation is satisfied during both the coverage and claims handling periods. Many others were however satisfied that the contractual service margin would be released over the coverage period only because the profit-making activity was in their view limited to providing insurance coverage.

Some constituents believed that favourable developments subsequent to an exhausted contractual service margin should be recognised in profit or loss until all prior losses have been fully offset. After this, a contractual service margin should be re-established.

Several constituents believed that if the unit of account would be lower than portfolio-level; this could result in considerable operational complexity that increases costs without clear benefits.

A majority of constituents welcomed the introduction of the ‘mirroring’ concept to reflect the asset dependency for participating contracts but they did not support the ED’s mirroring approach. A majority of constituents expressed concerns about the narrow scope of the measurement and presentation exception, the complexity arising from the arbitrary decomposition of the cash flows, and the reduced comparability because of the difference with the general fulfilment cash flow model (building blocks model) that applies to all other insurance contracts. A key concern was also that the proposals for the contractual service margin were not sufficiently developed for contracts with a dependency on the asset returns and allowed only for a limited unlocking of the contractual service margin, which was contradictory to the definition of the contractual service margin as the unearned profit.

Furthermore, a majority of constituents commented that the ED did not sufficiently explain how the IASB mirroring approach should be applied in practice.

A majority of constituents expressed support for the key principles of the alternative approach under development by the European insurance industry. Some constituents recommended that the IASB allow sufficient time for testing any alternative proposal to ensure that the application mechanisms work appropriately for various products under different economic scenarios.

Life insurance

A majority of constituents did not support the earned premium approach as proposed by the ED, which recognises revenue as services are provided. Disaggregating non-distinct investment components from the earned premium revenue number would be very complex and unduly costly to implement as the data required were not readily available and difficult to obtain.

A minority of constituents supported the earned premium approach as it would enable users to understand the underlying movements and it would be more comparable with other industries.

Some constituents mentioned that the summarised margin approach would be more appropriate.

Some constituents noted that users preferred volume information (e.g. gross written premiums and new business premiums), as these were key performance indicators for the life insurance industry.

Non-life insurance

Some constituents agreed with the application of the earned premium approach to non-life insurance activities.

Press release

Feedback statement

© EFRAG - European Financial Reporting Advisory Group