ASB Response to IASB ED Insurance Contracts

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the Financial Reporting Council
Accounting Standards Board
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www.frc.org.uk/asb
Peter Clark
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
30 November 2010
Dear Peter
IASB ED Insurance Contracts
This letter sets out the comments of the UK Accounting Standards Board (ASB) on
the IASB Exposure Draft (ED) Insurance Contracts.
The ASB agrees with the IASB that insurance accounting is currently viewed by
many users as a ‘black box’ that does not provide relevant information about the
insurer’s financial position. As such, the ASB supports the IASB in its aim to provide
a comprehensive framework that will enable insurance companies to provide
relevant information to users of financial statements for economic decision making.
We believe that the IASB’s measurement model proposed in the ED goes a long way
to providing just such a comprehensive and coherent framework. However, we
recognise that there are some areas of detail that require further consideration by the
IASB before a final standard is issued, although we do not believe that amendments
to address those areas of detail would lead to significant changes in the model
proposed in the ED.
Answers to the questions in the invitation to comment section of the ED are included
in the appendix to this letter. The following are some concerns with aspects of the
measurement model proposed in the ED which we believe would need to be
addressed prior it being finalised.
1. We believe that the change proposed to the scope has led to confusion as to
the types of contracts that should be within the scope of the ED (including
financial guarantee contracts). We note that the existing scope of IFRS 4 has
worked well in practice and would recommend that IASB make no changes to
it. However, if the IASB decides to retain the scope exemptions in the ED we
believe a clear explanation for the rationale behind these is required in order
to avoid implementation problems on initial application (see more detail in
the answer to question 11 in the appendix).

ASB Response to IASB ED Insurance Contracts
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2. We suggest that the use of the modified measurement approach for short-
duration contracts is permitted but not required. We believe that the
modification itself is a concession for entities with short-duration contracts
and that it should be up to the entities to decide whether it is appropriate for
them to take up the concession. As such, to assist users in their
understanding of the information included in the financial statements the
disclosure requirements in the final standard should set out a requirement for
entities to provide information on their rationale for adopting that model.
3. The ED prohibits insurers from presenting volume information on the face of
the financial statements. The ASB understands that users are particularly
concerned about the loss of volume information from the face of the insurer’s
income statement. They are concerned that the presentation approach in the
standard would deprive them of vital information about the business
undertaken by the insurer during the period. The ASB believes that more
work is required to ensure that the requirements in the final standard allay
users’ concerns in this area. We believe that the best way in which this
information can be presented in the financial statements, without making
them cluttered, should be considered during the field testing of this standard.
(see point 5 below).
4. We also draw you attention to the issues in relation to transition adjustments
and the effective date for the final standard. Given the many regulatory and
accounting changes faced by the insurance industry we would recommend
that the IASB work closely with the insurance industry and users to ensure
that a cost effective and smooth transition to the measurement model is
achieved. In this respect, we would draw your attention in particular to the
treatment of the residual margin in the insurer’s extant portfolio on transition
to the new standard, which will lead to the entire deferred profits in those
portfolios being transferred to retained earnings. We believe this approach to
transition disregards the long term nature of certain insurance contracts and
will lead to future profits on those not being recognised. We would
recommend that the IASB consider permitting other approaches to transition
5. We understand that the IASB is currently conducting some field testing in
relation to the application of the requirements in the ED. We would
recommend that the IASB considers the scope and sufficiency of such field
testing to ensures that it deals with a wide range of business types and sizes.

ASB Response to IASB ED Insurance Contracts
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We would also recommend that the IASB ensure that the results of the field
testing are sufficiently transparent and made available to constituents. We
believe that such an approach will ensure a smooth transition for the
insurance industry as well as the users of financial statements as well as
reducing any implementation problems (see more details in answers to
question 17 in the appendix).
If you would like to discuss these comments, please contact Seema Jamil-O'Neill on
020 7492 2422.
Yours sincerely
David Loweth
Technical Director
DDI: 020 7492 2420
Email: [e-mail]

ASB Response to IASB ED Insurance Contracts
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Appendix: Responses to questions in the IASB ED Insurance Contracts
Measurement
Question 1 – Relevant information for users (paragraphs BC13–BC50)
Do you think that the proposed measurement model will produce relevant information that
will help users of an insurer’s financial statements to make economic decisions? Why or why
not? If not, what changes do you recommend and why?
ASB response:
1. The ASB agrees that the proposals in the ED represent an improvement in
financial reporting of insurance contracts. In particular, we believe that the
accounting and measurement proposals in the ED which provide similar
treatment for life and non-life contracts will enhance the understandability
and consistency of insurer's financial statements. We believe the ED’s
proposals make it easier for users to understand the insurer’s financial
position in the context of its business model and to compare it to those of
other insurers.
2. We also believe that the inclusion of the explicit margins from the insurance
contracts on the face of the statement of financial position will ensure that
users have access to full information about the insurance entity’s profitability.
Although, we note there are concerns in relation to the appropriate disclosure
of volume information that would need to be addressed before the IASB can
finalise the standard. For more detail see our answer to question 13.
3. We also note that there are areas of detail where further consideration is
required before the proposals can be issued as the final standard. We discuss
some of these areas of detail together with some proposed solutions in the
answers to the following questions.
Question 2 – Fulfilment cash flows (paragraphs 17(a), 22–25, B37–B66 and BC51)
(a) Do you agree that the measurement of an insurance contract should include the
expected present value of the future cash outflows less future cash inflows that will
arise as the insurer fulfils the insurance contract? Why or why not? If not, what do
you recommend and why?
(b) Is the draft application guidance in Appendix B on estimates of future cash flows at
the right level of detail? Do you have any comments on the guidance?
ASB response:
4. The ASB agrees with the IASB that measurement of an insurance contract
should include the expected present value of the future cash flows that will
arise as the insurer fulfils the insurance contract. We also agree that the
portfolio is the appropriate level of measurement for insurance contracts.