CIA (e)Bulletin/(e)Bulletin de l'ICA
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November 2013

CIA Submission on IASB Exposure Draft: Highlights

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By Mike Hale, FCIA

On October 23, the CIA submitted its comments on the International Accounting Standards Board’s (IASB) exposure draft (ED) on accounting for insurance contracts (International Financial Reporting Standard 4, or IFRS4).

The comments were prepared by the Subcommittee on International Accounting and Actuarial Standards following the due process of the Committee on International Relations.

I have had the good fortune to chair this subcommittee at a time of accelerating standards development at both the IASB and the International Actuarial Association (IAA). The work has been made easy by the knowledgeable and committed team, each of whom has thoughtfully contributed at every stage of our efforts.

The CIA submission is on the Institute’s website and, for those familiar with the ED, is an easy read. In the outline below, I am attempting to bring out the highlights for a broader audience.

The IASB made a number of changes from the earlier ED, most notably:

  1. Making available a top-down approach for determining yield curves using returns on reference assets and deducting all of the elements (mainly credit risk) not relevant to the insurance liabilities. This is an allowable alternative to this bottom-up approach (risk-free rates plus an illiquidity premium).

This was coupled with some guidance, drawn from the Fair Value Measurement Standard, with respect to discount rates at durations where there are no observable market rates.

In the CIA submission, we welcomed the greater flexibility and required use of appropriate judgement in the ED, and underlined the inappropriateness of using simple extrapolation for yield curves.

  1. Requiring use of Other Comprehensive Income (OCI) to smooth the Profit and Loss (P&L) impact of changes in the liabilities arising from changes in the yield curve. Using OCI involves retaining the yield curves at issue for in-force business, extensive work to estimate the needed initial values, and cumbersome explanations.
In the CIA submission we recommended strongly that use of OCI be optional. We believe that many companies would prefer a fair-value approach in light of the increased stability available in longer discount rate assumptions under the ED. For companies opting to use OCI we advocated simpler approaches to determine initial values at the effective date of the new standard.
  1. Requiring a "mirroring" concept (essentially valuing the future cash flows at the carrying value of the underlying assets) where the contract requires the company to hold underlying items and specifies a link between payments to policyholders and returns on those items.
In the CIA submission, we recommended extending mirroring to situations where underlying items are held to match rates credited to policyholders in the absence of a contractual requirement (e.g., index-linked contracts).

We also made the case for recognizing that signing a participating contract invokes a legal and regulatory regime that bases payments to policyholders on the results of the underlying items.
  1. Requiring a new revenue measure incorporating an "earned premium" equal to the expected benefit payments (excluding investment components) and expenses (including a component for recovery of acquisition costs). Income statement benefit payments and expenses would be similarly adjusted.
In the CIA submission, we indicated that we saw little value in this approach to determining the revenue line and a lot of cost in changing valuation and administrative systems to separate out the investment component. We understand that the IASB believes the revenue approach in the ED is consistent with that for other types of business.
  1. Requiring a Contractual Service Margin (CSM) to be held in the liability so that no profit is recognized at issue but is released from the CSM over time as contract services are delivered.
The ED has a simple allocation of changes:
  • Changes in future cash flows go through the CSM;
  • Changes in yield curves go through OCI; and
  • Changes in the Risk Margin (the add-on to the expected liability that would be required to transfer the liability) go through P&L.

In the CIA submission, we strongly recommended that changes in the risk margin also go through the CSM because of the close relationship between expected cash flows and the risk margin.

Finally, recognizing that no matter what comes out in the final standard, there will be a need for major systems development and education efforts, we urged the IASB to allow ample time for implementation and to create an implementation oversight group to monitor progress. An important aspect of this will be promoting adoption of IFRS4 in key jurisdictions around the world.

We are looking forward now to promulgation of the final standard and the development of related IAA guidance for actuaries, hopefully suitable for adoption by Canada.

Mike Hale, FCIA, is Chair of the Subcommittee on International Accounting and Actuarial Standards.


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