The level of aggregation for measuring the contractual service margin was brought up for discussion in the IASB’s education session in February 2015.
The Board was reminded of its earlier decisions for non-participating contracts. It considered how these might impact the accounting for participating contracts, but did not make any decisions.
The objective of the proposed insurance contracts standard is to provide principles for measuring an individual insurance contract.
Consequently, companies would be able to use different techniques for measuring insurance contracts, provided that the principles are met.
“Defining the level of aggregation dives deeply into what is core to the insurance business, namely pooling of underwriting and – in the case of participating business – investment risks, which need to be transparent in the financial statements.”
Some Board members think that the IASB should further clarify the principles – specifically, whether contracts with different durations could be aggregated and, if so, how this would impact the recognition of the contractual service margin.
For participating contracts, the staff believed that applying the aggregation principles could be less straightforward where:
In this regard, the staff clarified that payments arising from existing contracts to future policyholders are, in principle, no different from payments from those contracts to existing policyholders. Therefore, this requirement does not affect the level of aggregation.
In general, Board members agreed that when a company's discretion permits it to insulate itself from potential losses, this should be considered when developing proposals for the application of the general model to contracts with participating features.
The staff plan to consider whether the presence of regulatory constraints on pricing should result in any exception to the principles for measuring particular components of insurance contracts at a later date.
We will continue to report on the latest developments in the IASB’s insurance contracts project. Visit our IFRS – Insurance hot topics page.
© 2016 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved. KPMG IFRG Limited, registered in England No 5253019. Registered office: 15 Canada Square, London, E14 5GL, UK.