Project Updates

Insurance Contracts—Joint Project of the IASB and FASB

Last Updated: December 30, 2009 (Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the IASB and FASB (the Boards). It was prepared by the staff and is for the information and convenience of the Boards’ constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.

Agenda Decision Announced
Project Objective
Due Process Documents
*Decisions Reached at Last Meeting
*Summary of Decisions Reached to Date
Next Steps
*Board/Other Public Meeting Dates
Background Information
*Contact Information

AGENDA DECISION ANNOUNCED

At the Board meeting on October 29, 2008, the FASB Chairman announced that the Board has decided to join in the IASB’s insurance contracts project.

PROJECT OBJECTIVE

The objective of this joint IASB/FASB insurance contracts project is to develop a common, high-quality standard that will address recognition, measurement, presentation, and disclosure requirements for insurance contacts. Specifically, this project is intended to:

1. Improve and simplify the financial reporting requirements for insurance contracts.
2. Eliminate numerous pieces of current U.S. accounting literature that add to the complexity of accounting for insurance contracts.
3. Provide investors with more decision useful information. 

DUE PROCESS DOCUMENTS

On August 2, 2007, the FASB issued an Invitation to Comment, An FASB Proposal: Accounting for Insurance Contracts by Insurers and Policyholders. That Invitation to Comment included a Discussion Paper issued in May 2007 by the IASB, Preliminary Views on Insurance Contracts, setting forth its preliminary views on the main components of an accounting model for an issuer’s rights and obligations (assets and liabilities) under an insurance contract. The FASB issued the Invitation to Comment to gather information from its constituents to help decide whether there was a need for a comprehensive project on accounting for insurance contracts and whether the FASB should undertake such a project jointly with the IASB. The comment period for both documents ended November 16, 2007.

Use the links below to view the individual comment letters received by the FASB In response to its Invitation to Comment or a summary of those comment letters.

Insurance Contracts Comment Letters

Summary of Insurance Contracts Comment Letters 

*DECISIONS REACHED AT LAST MEETING (December 16, 2009 Joint Meeting with IASB) 

1. The unbiased, probability-weighted average of future cash flows expected to arise as the insurer fulfils the obligation
2. The time value of money
3. A risk adjustment for the effects of uncertainty about the amount and timing of future cash flows
4. An amount that eliminates any gain at inception of the contract.

1. The risk adjustment should measure the insurer's view of the uncertainty associated with the future cash flows. The Boards discussed various sources of information that an insurer might use to estimate this amount (for example, the price the insurer would charge if it were taking on identical obligations with the same remaining risk exposure, or reinsurance prices) and asked the staff to investigate this issue further.
2. The measurement of an insurance liability should not be updated for changes in the risk of nonperformance by the insurer.

*SUMMARY OF DECISIONS REACHED TO DATE (as of November 24, 2009)

Recognition and Derecognition (November 24, 2009)

The Board continued deliberating the joint project on accounting for insurance contracts by discussing the recognition of an insurance contract and the derecognition of insurance liabilities.

The Board tentatively decided that an entity should recognize an insurance obligation at the earlier of (1) the entity being on risk to provide coverage to the policyholder for insured events and (2) the signing of the insurance contract.

The Board discussed embedded options in an insurance contract for purchases of items ranging from additional insurance coverage(s) to goods or services unrelated to insurance. The Board was not asked to reach a decision on this topic and will discuss this topic at a future Board meeting.

The Board tentatively decided on a principle that an insurance liability should be derecognized by an entity when that obligation no longer qualifies as a liability. The liability is eliminated when the entity is no longer on risk and no longer required to transfer any economic resources for that obligation.

November Joint Meeting with IASB (November 18, 2009)

The Boards discussed participating features in insurance contracts. Staff presented two views on how to deal with such contracts:

• View 1: All cash flows that arise from a participating feature should be included in the measurement of the insurance liability on an expected present value basis. The participating feature is not considered separately for recognition, classification and measurement, but rather as part of the whole contract.
• View 2: The cash flows expected to arise from a participating feature are analyzed to determine whether those flows are required (for example, by the contract or by a statute) or are discretionary. Required cash flows (if there are any) will be included in the measurement of the insurance liability. Discretionary cash flows will be recognized when the entity has an obligation to make payments.

1. Identifying possible issues arising from lack of symmetry between policyholder accounting and the accounting by the issuer of the insurance contract, and
2. Any similarities with accounting for reinsurance contracts from the perspective of the policyholder.

The Boards also discussed the similarities and differences between their preliminary decisions on a measurement approach. At a high-level, the Boards agreed with a three building block approach (current estimates of [expected, that is, probability-weighted] future cash flows, incorporation of time value of money, and an explicit margin). The Boards asked the staff to analyze the potential remaining differences between the FASB’s measurement approach (current fulfilment value) and the IASB’s measurement approach (developed in its project to amend IAS 37, Provisions, Contingent Liabilities and Contingent Assets). In this analysis, the Boards asked the staff to draft language to clarify the measurement objective including the role of an uncertainty adjustment under both the IASB and the FASB measurement approaches. The goal of the analysis is to arrive at a converged tentative decision on measurement.

The Boards also affirmed that an insurer should recognize all acquisition costs as an expense when incurred. In addition, both Boards agreed that the insurer should not recognize a part of the premium as revenue (or income) at inception equal to the acquisition costs incurred. The FASB Board unanimously agreed to this decision, while the IASB Board voted 8-6 in favor of the decision.

The Boards discussed the presentation of the performance statement (statement of comprehensive income). This discussion was intended to be educational in nature and the Boards were not asked to make a decision.

July Joint Meeting with the IASB (July 23, 2009)

The Boards discussed which of the two remaining candidate measurement approaches for insurance contracts should be selected:

1. A measurement approach based on the approach being developed in the IASB’s project to amend IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
2. A current fulfilment value without an explicit risk margin.

The FASB affirmed tentatively that the objective of the liability measurement is to report a value on the basis of the insurer’s fulfilment of its contractual obligations to its policyholders over time. The IASB did not reach a clear consensus.

The Boards also affirmed tentatively that an insurer should recognize all acquisition costs as an expense when incurred. In addition:

1. The FASB affirmed tentatively that the insurer should not recognize any revenue (or income) at inception to offset those costs incurred.
2. The IASB affirmed tentatively that the insurer should, at inception, recognize as revenue the part of the premium that covers acquisition costs (limited for this purpose to the incremental costs of issuing [that is, selling, underwriting, and initiating] an insurance contract and not including other direct costs).

Measurement Approach and Time Value of Money (July 21, 2009)

The Board continued to discuss the accounting for insurance contracts, in particular, how an entity would measure an insurance liability. The Board decided that the objective of the liability measurement is to report a value based on the insurer’s fulfillment of its contractual obligations to its policyholders and that the fulfillment value should include only a composite margin with no explicit risk margin.

The Board decided that the expected cash flows in the measurement of an insurance liability should be discounted to reflect the time value of money. It also agreed that the discount rate used should be updated each reporting period. The Board will discuss at a future meeting the discount rate that should be used.

Risk Margins and Acquisition Costs (May 18, 2009)

The Board discussed several aspects of the accounting for risk margins: (1) the need for a risk margin in the measurement of an insurance liability, (2) measurement of the risk margin, and (3) remeasurement of the risk margin. The Board did not reach any decisions on these issues.

The Board decided that an entity should expense all acquisition costs when incurred. It also decided that an entity should not recognize any revenue (or income) to offset those costs incurred.

Cash Flows (April 2, 2009)

The Board agreed that a measurement of the fulfillment value of an insurance contract should use expected cash flows rather than a best estimate of cash flows. The Board also agreed that those expected cash flows should be updated each period.

The Board discussed whether market inputs should be part of the measurement of cash flows when a fulfillment value notion is used. The Board agreed that the measurement of cash flows should consider all available information that represents the fulfillment of the insurance contract. All available information includes, but is not limited to, industry data, historical data of an entity’s costs, and market inputs when those inputs are relevant to the fulfillment of the contract.

Measurement (February 25, 2009)

The Board agreed to explore an approach where an insurance contract is measured at a current fulfillment value rather than fair value as defined in FASB Statement No. 157, Fair Value Measurements (an exit value). The fulfillment value is currently not a defined measurement approach but would be based on entity-specific inputs that generally would not require consideration of market participant views. The Board discussed the potential components of a fulfillment value but did not come to any conclusions.

The Board agreed that in principle the initial recognition of an insurance contract should not result in the recognition of an accounting profit. However, some Board members acknowledged that future deliberations and decisions (such as the accounting for acquisition costs) may necessitate revisiting whether an accounting profit should be recognized at inception of an insurance contract.

NEXT STEPS

The Board will continue its discussions of insurance contract accounting issues and work towards issuing an Exposure Draft in April 2010.

*BOARD/OTHER PUBLIC MEETING DATES

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

BACKGROUND INFORMATION

The IASB’s Discussion Paper presents its preliminary views on the main components of an accounting model for all contracts that meet its definition of an insurance contract. The principal focus of the preliminary views is the measurement of insurance liabilities.

For additional and current information concerning the IASB’s insurance contracts project use the link below. The comment letters received by the IASB on its Discussion Paper also are available via the link below.

IASB Insurance Contracts Project Update

*CONTACT INFORMATION