The IASB has issued its targeted re-exposure draft on insurance contracts, marking a major step forward towards implementing a common insurance reporting framework across much of the world. The debate has run for more than 15 years and the conclusion of the insurance project is now in sight.
The new proposals apply to all insurance contracts, including certain financial guarantees, rather than insurance entities, and to investment contracts with a discretionary participation feature (DPF) issued by insurance companies.
Joachim Kölschbach, KPMG’s global IFRS insurance leader
A revised measurement model
The re-exposure draft introduces a revised current value measurement model, with significant changes in key areas that have been at the heart of the debate since the initial proposals were released in 2010.
The latest proposals would go some of the way towards addressing concerns that the changes to insurance and financial instruments accounting would create volatility in profit or loss. One way that the proposals aim to achieve this is by stripping out from the income statement any changes in discount rates on the valuation of an insurer’s liabilities and changes in fair value for some of its financial assets under proposed revisions to IFRS 9 Financial Instruments. To this end, the effects of changes in discount rates on insurance liabilities would be recognised in other comprehensive income (OCI), rather than profit or loss.
There continues to be a simplified (or ‘premium-allocation’) measurement approach, which would be expected to reduce the operational complexity of applying the measurement model to short-duration contracts.
A new presentation approach
The re-exposure draft also introduces a new presentation approach for both the statement of profit or loss and OCI and the statement of financial position, which would significantly change the way insurers – especially life insurers – report performance. Insurance contract revenue would be allocated over the coverage period in proportion to the value of the services provided in each period, which would be very different to the premium figures presented today.
Other major changes
The proposals contain several other major changes, including:
· an unlocked contractual service margin, which would change the timing of profit recognition;
· a mirroring approach, which would better align the measurement of participating contracts with their underlying items; and
· a retrospective approach for the transition to the new standard.
Broad business impacts
The proposals would be likely to have a profound impact across an organisation, affecting asset-liability management and decisions over product design, features and pricing. Capital management and regulatory requirements may also be affected in some jurisdictions. And the new data collection and retention requirements could necessitate systems upgrades, increased demand for resources and additional training.
Convergence with the FASB
The IASB developed the proposals in the re-exposure draft jointly with the FASB. The IASB and the FASB reached the same conclusions in many areas, but reached different conclusions on some limited aspects – e.g. scope, and certain aspects of the measurement model. The FASB is expected to publish its exposure draft shortly.
Comments are due to the IASB by 25 October 2013. The FASB’s comment period is expected to follow a similar timeline.
For more information on the proposals, please go to the IASB’s and KPMG’s press releases. Look out for KPMG’s upcoming publications, which will help you to understand what the proposals mean for your business.