The boards noted that, under the principle above, the following cash flows would be included in the measurement of the insurance contract:
- the participating benefits that an insurer expects to pay to policyholders of participating insurance contracts (ie on an expected value basis); and
- the incremental costs of selling, underwriting, and initiating an insurance contract (acquisition costs), but only for those contracts that are actually issued. The boards tentatively decided that an insurer should determine whether those costs are incremental at the level of an individual contract.
The staff proposed an unbundling principle based on an assessment of whether there is significant interdependence between components of an insurance contract. However, the boards questioned the clarity of the notion of significant interdependence.
Instead, the boards asked the staff to develop an unbundling principle that uses as a starting point whether a component can introduce variability in the overall cash flows of the insurance contract for risks that are not considered part of the provision of insurance protection. Other factors may be considered such as:
- the policyholder's ability to obtain some or all of the contract value through withdrawal or redemption; and
- the nature of the risks that are transferred by a component (eg whether those risks are primarily financial or not).
The boards tentatively decided that, if development of an unbundling principle based on such a notion is not achievable, the forthcoming exposure draft will include an unbundling principle based on significant interdependence.
The boards further decided that the forthcoming exposure draft should include guidance to help insurers understand when to unbundle a component of an insurance contract. That guidance will provide factors for consideration, as well as examples.
The boards tentatively decided that an insurer should present income and expense for insurance contracts using a margin presentation, broadly showing the following items:
- the change in the risk adjustment during the period [this applies only in the IASB's model that includes such an adjustment], and the release of the residual or composite margin during the period;
- the difference between the expected and the actual cash flows;
- changes in estimates (remeasurements); and
- interest on insurance liabilities (ideally presented or disclosed in a way that highlights its relationship with interest on assets backing those liabilities).
Consequently, an insurer should treat:
- all premiums in the same way as deposits; and
- all claims expenses, claims handling expenses and other contract-related expenses in the same way as repayments of deposits.
This margin presentation (summarised margin presentation) will be supplemented by disclosures of those premiums and expenses.
The boards acknowledged the importance of the presentation of the statement of comprehensive income, and the forthcoming exposure draft will ask respondents to provide specific input on this issue.
Interest accretion on residual or composite margins
The boards discussed whether interest should be accreted on residual and composite margins and, if so, which interest rate should be used.
The IASB affirmed its tentative decision to accrete interest on residual and composite margins and tentatively decided to use an interest rate that is locked-in at inception of the contract.
The FASB affirmed its tentative decision not to accrete interest on residual and composite margins
The IASB plans to publish an exposure draft in late July. The FASB plans to decide in July the best means for obtaining stakeholder input on the IASB proposal (for example, by publishing it as an exposure draft or in some other way).