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Deloitte
Points made in the comment letter to the IASB include:
EBA
The ED’s requirements would apply to insurance and reinsurance contracts issued by an entity, reinsurance contracts held by an entity and investment contracts issued with a discretionary participation feature provided that the entity also issues insurance contracts (paragraph 3). Nevertheless, the proposals do not provide enough guidance on how the requirements would apply to a group including banks with insurance subsidiaries, which might include a bank selling investment contracts with a discretionary participation feature (but not issuing insurance contracts) and an insurance entity selling insurance contracts. The ED does not clarify whether the bank shall apply the proposals of the ED to these contracts (considering that the bank is part of a group which includes entities issuing insurance contracts) or account for these contracts under IAS32/ IFRS7 and IFRS 9 requirements (considering that the bank does not issue insurance contracts at its own level). Thus, there might be arbitrage opportunities within the group of entities by applying different accounting standards to similar transactions so as to achieve a more favourable outcome.
The EBA is concerned that in the absence of enough clarity on the scope of application of the ED requirements, the scope for judgement could increase and financial information might become less comparable across entities. Thus, the EBA would suggest that the IASB provides additional guidance and clarifies the appropriate accounting treatment of such transactions in the consolidated accounts, so as to ensure that transactions with similar economic substance are accounted for consistently.
ESMA
ESMA supported the proposals that were reflected in the 2010 ED on Insurance Contracts, with some exceptions. The current proposals respond to most of the concerns expressed then in ESMA’s comment letter. However, ESMA has concerns that the mirroring approach and the accounting for changes in the current value of an insurance contract in Other Comprehensive Income (OCI) add complexity and may create accounting mismatches.
As interest rate risk is a key element in the insurance business, ESMA believes that the effect of the interest rate risk on the fair value of assets and the present value of the fulfilment cash flows for insurance contracts should both be recognised in profit or loss. We also believe that the changes in the discount rate could be presented separately from the effects of changes in other long term assumptions either in the notes or in profit or loss.
Should the IASB decide to retain in the final standard the approach of recognising changes in the discount rate in OCI, ESMA believes it is crucial that the standard requires adequate disclosures in the notes to enable users to have a comprehensive view on the performance of insurance contracts.
FEE
FEE supports the IASB proposal (paragraphs 30-31) that the contractual service margin should be adjusted for differences between the current and the previous estimates of the present value of future cash flows that relate to future coverage and other future services as such treatment would contribute to more useful and relevant information provided to the users of financial statements. FEE also believes the contractual service margin should be adjusted for changes to the risk adjustment that relate to future services.
The scope of contracts that may qualify for mirroring may appear to be too narrow and there may be an arbitrary “bright line” between the treatment of this “mirroring” class of contracts and participating contracts with broadly similar features. This “bright line” will be further affected by the new category of embedded derivatives (closely related, but to be separated and with all changes presented in profit or loss) that is identified under the mirroring approach and might lead to new accounting mismatches.
FEE would welcome an alternative that proposes a single, consistent measurement approach for all insurance contracts that promise benefits which depend on asset returns or the surplus of a company as a whole.
FEE acknowledges that in proposing to present the effects of the changes in the discount rates in OCI the IASB has responded to certain preparers’ as well as users’ concerns about short term volatility being reflected in profit or loss. However, the mandatory use of OCI will create accounting mismatches where insurers’ assets are not held at fair value through OCI. In FEE´s opinion, accounting mismatches may easily be reduced by introducing an option on a portfolio level to recognise all changes in the insurance liability measurement in profit or loss. FEE therefore remains supportive of a non-mandatory use of OCI and the introduction of a policy choice on a portfolio basis on whether to use profit or loss or OCI to reflect changes in the discount rate.
Insurance Europe
Insurance Europe is pleased that the IASB has introduced mechanisms in the revised proposals that it has long advocated, such as the recognition of the importance of an appropriate discount rate, the introduction of an other comprehensive income (OCI) model for changes in market interest rates on both insurance liabilities and related assets, the unlocking of the contractual service margin and the introduction of revised transition principles.
However, Insurance Europe believes that the OCI model should not be mandatory, as insurers should have the ability to apply fair value either through the profit and loss account or through OCI. This would avoid possible accounting mismatches and inappropriate performance reporting for certain types of insurance business. Furthermore, Insurance Europe opposes the IASB’s overly complex requirements for the measurement of participating contract liabilities. It has put forward principles for an alternative proposal to simplify these requirements and produce a more accurate representation of their performance.
Insurance Europe also emphasises that it is essential that the IASB fully recognises the link between insurance liabilities and related assets in reporting performance. It therefore calls on the IASB to ensure consistency between the proposals for insurance contracts (IFRS 4 Phase II) and those for financial instruments (IFRS 9), as the standards are interrelated.
Comment-letter-(with CFO Forum)-to-IASB
Comment-letter-(with CFO Forum)-to-EFRAG
EFRAG's-draft-comment-letter-to-IASB