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The Actuary The magazine of the Institute & Faculty of Actuaries

IASB’s Exposure Draft ‘Insurance Contracts’

While the International Actuarial Association (IAA) will be taking the lead on a detailed response to the International Accounting Standards Board’s (IASB’s) Exposure Draft, published at the end of July, the Actuarial Profession intends to comment on issues that may have a disproportionate impact on UK insurers or where the IAA’s response does not sufficiently highlight our concerns.

Probable areas of concern include:
>> The intended treatment of the free estate in a with-profits fund needs to be clarified. In one paragraph it is implied that the free estate should be split between a shareholder and policyholder element but this appears to be contradicted elsewhere. Ideally, it would seem desirable to give a three-way split, thereby separately identifying the policyholder and shareholder elements of the free estate along with liabilities to current policyholders.
>> While a number of accounting mismatches arising in unit-linked business are addressed in the exposure draft, it is disappointing that the mismatch that currently can arise due to a difference between the deferred tax charge under IAS 12 and tax allowances within a unit fund has been allowed to stand.
>> The proposal to require a risk margin calculated by a cost of capital approach to be calibrated to a confidence level is impractical and of very little theoretical benefit. It will require stochastic modelling for many companies that otherwise have no need of this technique.
>> A strict interpretation of the rules on contract boundaries will require a major change in systems for, in particular, medical expense insurers for very little practical benefit. The resultant profit from future premiums would be offset by a corresponding increase in the residual margin whose run-off is arbitrary.