INFORMATION FOR OBSERVERS. Life insurance Accounting approaches: summary table. Approach D Current exit value Yes (though if

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1 30 Cannon Street, London EC4M 6XH, England International Phone: +44 (0) , Fax: +44 (0) Accounting Standards Website: Board INFORMATION FOR OBSERVERS IASB Meeting: Project: December 2005, London Insurance contracts (phase II) This note covers agenda paper 9B This document is provided as a convenience to observers at IASB meetings, to assist them in following the Board s discussion. It does not represent an official position of the IASB. Board positions are set out in Standards. These notes are based on the staff papers prepared for the IASB. Paragraph numbers correspond to paragraph numbers used in the IASB papers. However, because these notes are less detailed, some paragraph numbers are not used. Life insurance Accounting approaches: summary table Can the be viewed as a present value of future cash flows? Are embedded derivatives separated (if not closely related )? Approach A (though if (though if assumptions do not assumptions do not change, the result is also change, the result is also equivalent to a equivalent to a retrospective approach) retrospective approach) Arguably not needed No (not needed) V:\IASB\Meeting Files\2005\1205\Observer Notes\0512ob09b.doc

2 Acquisition costs Deferred Deferred Not deferred Not deferred Amortised in line with profit drivers Amortised in line with profit drivers Implicitly reflected in liability cash flows to Implicitly reflected in liability cash flows to To be determined whether presented as separate asset or To be determined whether presented as separate asset or the extent the costs are estimated to be recoverable the extent the costs are estimated to be recoverable deducted in measuring liability deducted in measuring liability Can gain be recognised at? No No No Conceptually yes Include some constraints if reliability is in doubt? Can loss be recognised at Generally no Conceptually yes? to the extent that acquisition costs are not deferrable to the extent that acquisition costs are not deferrable Perhaps through loss recognition test (to be May need further work to identify causes of apparent losses and through loss recognition test (eg loss leader ) through loss recognition test (eg loss leader ) consider their meaning. 2 of 5

3 Margins for risk and profit Implicit in initial Implicit in initial Implicit in initial Explicit at each reporting date as difference between explicit at one date and the next date How is earned portion of margin for risk and profit determined? Estimates Discount rate 3 of 5

4 Liability adequacy test? At : yes No (not needed) to be to be to be Later: no (not needed) Credit risk inherent in the Explicit at insurance liability Explicit subsequently Assets backing insurance Existing IFRSs Amortised cost for Existing IFRSs Existing IFRSs liabilities and related capital financial assets with fixed or determinable payments (details to be Otherwise, existing IFRSs 4 of 5

5 What is included in profit or loss (in respect of liability)? Approach A Premiums Premiums Premiums Premiums Benefit payments Benefit payments Benefit payments Benefit payments Change in benefit Change in benefit Change in benefit Change in benefit Interest on liability (at Interest on liability (at Interest on liability (at Interest on liability (at original risk-free rate) original risk-free rate) current risk-free rate) current risk-free rate) Amortisation of DAC Amortisation of DAC Acquisition costs Acquisition costs Non-deferrable Non-deferrable Possibly loss at Gain or loss at acquisition costs acquisition costs (if liability (if sufficient adequacy test applies) evidence) Additional losses (if Additional losses (if Present value (at Present value (at any) from liability any) from liability current risk-free rate) current risk-free rate) adequacy test adequacy test of changes in of changes in estimates estimates # Change in benefit liability: arising from premiums received and benefits paid * Experience adjustments: differences between actual cash flows and previous assumptions 5 of 5