Our survey shows
that respondents appreciate the Board’s efforts and are pleased with the project’s progress. Yet, they expressed concerns over several aspects of the proposed accounting model.

Interested parties from around the world have commented on the proposed accounting standard for insurance contracts that the International Accounting Standards Board (the Board) published in its Exposure Draft of July 2010 (ED).

Comment letters: then and now

The number of comment letters, 247, is approximately 50% greater than those submitted for the Board’s earlier discussion paper in 2007. Respondents include insurers, accounting firms, regional accounting standards’ setters, regulators, actuarial firms, professional bodies, trade associations and a consortia of companies and organisations.

However, only a few letters were submitted by analysts and commercial investors. Despite the low representation of some of the primary users, it is apparent that the publication of the ED has focused attention on accounting for insurance contracts.

The reason for our survey

We surveyed a sample of the comment letters to gauge the response to the ED. The survey comprises 77 letters chosen to capture the geographic range and diverse types of respondents. While not comprehensive, the survey sufficiently presents the most commonly expressed views and gives an indication of the clustering of perspectives.

This paper discusses the topics shown by the survey to have the greatest significance to the respondents and how they will challenge the Board. A summary of the responses in the comment letters is followed by an expanded discussion.

Composition of the letters included in our survey*  Respondents by region Respondents by type

^{* Survey sample contained 77 letters.}

Key observations from the survey

Our survey shows that respondents appreciate the Board’s efforts and are pleased with the projects progress. However, they have expressed serious concerns over many aspects of the proposed accounting model.

There is broad support for the ultimate goal of a single global standard, notwithstanding the significant time and cost of implementation. Respondents expressed concern about the perception created by short-term volatility reflected in the measurement of long-term business and the potential to misrepresent the economics of the business.

Several letters cautioned that the Board should not let its intent to complete the project within a restricted timeframe limit the scope of further considerations and/or field testing activities, even if that would result in extending the project timetable.

Respondents’ concerns

Many respondents also voiced concern about the possibility that the Board, and the Financial Accounting Standards Board (FASB) in the United States, may not issue a converged standard for insurance contract accounting. When respondents were asked if the proposed standard would produce relevant information, answers ranged from qualified affirmative to strong negative – with most commenting that the proposed standard would give relevant information only if certain significant changes or clarifications were made.

Despite the widespread calls for significant changes to many aspects of the proposals, respondents broadly support the most fundamental aspects of the ED. Specifically, they support the building blocks based on fulfilment cash flows combined with an alternative approach for short-duration contracts.

The letters demonstrate that respondents believe the Board started at the right point, but they made diverse suggestions concerning what should happen from there. A notable exception is the US property/casualty industry, which believes that the proposed building block approach is fundamentally flawed for non-life contracts. As such, a separate model would be required.

With regard to the building blocks, many respondents expressed concern about how to apply probability-weighting of cash flows and limitations on cash flows (acquisition costs and overheads, in particular). The letters offer many varying views on discount rates. Several alternatives to the rate proposed in the ED (risk-free, plus an adjustment for liquidity) reflect the market price of credit in some way.

Views on the impact of IFRS

Furthermore, a number of responses linked the discount rate to the desire to use other comprehensive income for short-term market movements or raise the possibility to lock in the rate at inception. The letters show an awareness of the impact of IFRS 9 when it becomes effective and a desire for consistent measurement of assets and liabilities.

Most agree that there should be no gain at issue and prefer separate risk adjustment and residual margin over a single composite margin; but many specific concerns are raised around the calculation of the risk adjustment. A majority of respondents would like to see the purpose of the adjustment for risk better articulated.

Moreover, a number of letters advocated alternative approaches to the proposed release of the residual margin. Many suggested that the residual margin should be unlocked and adjusted to offset the effect on the measurement of liabilities that result from changes in estimates.

There is general support for a modified approach for certain short-duration contracts, with some respondents viewing it as an approximation of the main model and others as a separate model. Although there is support for the notion of a modified approach, many respondents believe it should be simplified significantly.

Respondents’ letters on issues and concerns

Respondents offered varying views on unbundling financial components from insurance contracts, although most find the proposed guidance confusing. They do not object, however, to continuing existing practice for separating embedded derivatives.

The letters give mixed views on the proposed presentation, with many expressing concern that the proposed summarized margin approach does not display important volume information. The margin should be on the face of the financial statements, rather than left to a footnote disclosure. Respondents are in wide-spread agreement with the disclosure principles, but have significant concerns over the volume and complexity of required disclosures.

There was practically no agreement with the proposal to disregard residual margins for business in force at the start date of the earliest period presented. Respondents stated that it is far better to at least use a reasonable approximation of the residual margin than to report significantly different profitability from older business compared to newer contracts.

The comment letters frequently suggested changes to the proposals that they believe would make them a better reflection of the economics of the insurance business. Respondents are aware that some of their suggestions may reduce the consistency of the insurance standard with other standards, but they also believe that the improved value of the information justifies inconsistencies in some cases.

The comment letters are both insightful, and diverse; sometimes competing thoughts on the insurance standard add to the challenges the Board faces. Perhaps most importantly, the Board must address volatility holistically, first deciding how changes in inputs to measurement should be presented in income.

The Board may be sympathetic to the concerns that the proposed standard does not reflect the economics of insurance, but nevertheless may not be persuaded to adopt solutions that do not result in the desired broader consistency with other standards. It may wish to take on consensus views that seem to exist in areas such as transition and the modification for short-duration contracts.

The Board must be mindful of the strong calls in the letters to reach a converged standard with the FASB. Although eager to complete the insurance project, it should take note that many respondents have requested further field testing and a continuous dialogue with various stakeholders, even if this extends the Board’s timetable.

The remainder of this paper expands the discussion of the views of respondents on these topics and demonstrates how the responses will challenge the Board. The areas of greatest concern, indicated by the most frequent and the lengthiest comments, relate both to some over-arching themes and to specific aspects of the proposals that respondents see as critical to the success of the standard.

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