Chief Financial Officer Paris, October 25, 2013

Transcription

1 Chief Financial Officer Paris, October 25, 2013 Comments on the Exposure Draft ED 2013/7 Insurance Contracts, A revision of ED/2010/8 Insurance Contracts Dear Mr Hoogervorst, In addition to being one of the largest financial institutions in Europe, BNP Paribas has significant insurance operations, particularly in the field of participating investment contracts, life insurance and creditor insurance contracts. The proposals in the ED are relevant to a major portion of our activities. As a member of the CFO Forum and the Fédération Française des Sociétés d Assurance (FFSA), we contributed to their response to the ED. However, we also wish to provide you with our own view, from the perspective of a conglomerate operating in the fields of financial activities and insurance. The French market is highly significant in Europe. In 2012, it accounted for 253 bn in gross written premiums. Technical reserves for Life insurance contracts accounted for 1,496 bn in 2012, including 1,208 bn of mathematical provisions relating to the general fund and 224 bn relating to unit-linked contracts. Due to regulatory requirements, contracts distributed on the French markets are widely homogeneous. The new IASB accounting model fails to reflect the insurance business model faithfully, both in terms of measurement and performance presentation The main concerns we expressed in our comment letter on the 2010 ED remain unaddressed in the current IASB proposal. The economic reality of the insurance business model based on active assetliability management and intergenerational mutualisation is still not reflected appropriately: disaggregation of a portfolio into small subsets e.g. cohorts for the computation of the contractual service margin is not conceptually sound in open portfolios of contracts. As explained below, disaggregation is irrelevant with regard to contractual obligations that demand intergenerational mutualisation; Mr Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London EC4M 6XH 1 / 13

2 contractual obligations are artificially split for measurement and/or presentation purposes irrespective of how contracts are priced, distributed to policyholders and subsequently managed by the insurer; accounting for participating contracts (mirroring approach) requires arbitrary breakdown of cash flows and does not reflect how policyholders participate in realised gains; revenue presented in the statement of profit or loss is artificial and not the aggregate requested by users to date. BNP Paribas supports the development of an alternative model that relies, as primary drivers, on the active asset-liability management and mutualisation inherent to the insurance business model Financial reporting standards should observe the features of insurance and participating contracts, which are based on intergenerational mutualisation Insurance relies on the pooling of risk and the mutualisation of generations of contracts. Diversification is one of the main characteristics of the insurance business model supporting its long-term nature. Portfolios of contracts cannot be disaggregated into cohorts without arbitrary splits as it would disregard the mutualisation of contracts. Existing as well as new investment contracts with discretionary participation features share the results of the insurer s general fund (see opposite). Furthermore, in real life, assets are not managed on a run-off basis to match a closed cohort of contracts. Management decisions both on the investment and the discretionary participation benefits strategyembed future new business assumptions into active asset-liability management and are based on the mutualisation of all contracts in a portfolio. Cost-based information is essential to the contractual obligations as the crediting rate is based on realised gains and losses. As a result, the contract economics do not consider market volatility. The insurance contract standard should consider the diversification and stability that characterize the insurance business and allow the key features of insurance and participating contracts to be faithfully reflected in the financial statements. Key features of French investment contracts with discretionary participation features All contracts participate in the insurer s pool of assets ( general fund ), except for their unit-linked component. Typical contract duration exceeds 8 years, being the minimum time period the policyholder has to hold the contract for its proceeds to be tax free. Active asset-liability management techniques are used for investments in the general fund, not in a closed book perspective, but on the contrary, in an open book perspective taking into account future new business assumptions (i.e. new premiums on contracts in force and new contracts). Active assetliability management aims at maximising the crediting rate to policyholders over the long term and mitigating the effects of short term volatility. The participation benefit account is based on realised investment income of the whole general fund. It does not include unrealised gains on underlying assets. The insurer has discretion over the following items: - amount of gains or losses to be realised; - overall amount of participation benefits allocated to policyholders, considering minimum regulatory and contractual obligations; - timing of allocation of the overall amount of participation benefits to individual policyholders - the overall amount must be allocated within 8 years to individual contracts in force at the date the participation benefit is allocated. 2 / 13

3 Active asset and liability management inherent to the insurance business model should be a primary driver of the proposed measurement approach In the IASB general model, financial assets and insurance liabilities are not measured on a consistent basis, disregarding standard asset-liability management practice. Accounting mismatches would arise if interest sensitive assets such as bonds were carried at amortised cost or at fair value through profit or loss, whereas the effect of changes in discount rates on insurance liabilities is presented in OCI. The measurement of insurance liabilities and underlying assets should be closely connected to asset and liability management. In the mirroring approach, we recognise and support the Board s objective to reflect the interaction between assets and liabilities, even though the proposal is not entirely satisfactory for reasons expressed below. The strong link between assets and liabilities is particularly true for participating contracts, such as the French Life insurance savings contracts and unit-linked contracts. The statement of profit or loss should reflect the underlying performance of our long-term business. It should disregard short term volatility, as it prevents the users of financial statements from understanding the amount, timing and uncertainty of cash flows. BNP Paribas supports the Board s objective of reflecting the interaction between assets and liabilities for contracts with participating features. To avoid accounting mismatches, we believe that all assets backing insurance contract liabilities, including derivatives, should be eligible for measurement at fair value through OCI under IFRS 9. Contracts should be measured as a bundle of rights and obligations consistently with how they are priced, sold and subsequently managed In the IASB proposal, participating insurance contracts are separated into three components with different measurement and presentation requirements. Asset management components may also have to be separated and accounted for under the revenue recognition standard; and investment components that cannot be bifurcated still have to be singled out and excluded from revenues. Further to these conceptual issues, the ED proposals introduce inextricable operational challenges to allocate contractual cash flows (e.g. premiums collected from policyholders, acquisition and contract management costs) to the various components based on objective criteria. BNP Paribas supports a measurement approach that aggregates all cash inflows and outflows relating to a contract into a bundle of rights and obligations, as insurers manage these contracts as a whole. 3 / 13

4 Participating contract measurement should reflect the interaction between assets and insurance liabilities in a single approach applicable to the contract as a whole As already mentioned, the treatment of participating contracts under the mirroring approach is overly complex, leading to possible inconsistencies in practical implementation of the standard. The required breakdown of cash flows is arbitrary as contractual obligations are closely linked. It may not be possible for some cash flows. Indeed, the Board erroneously assumes that cash flows on options and guarantees can be identified and assessed in isolation from other contractual cash flows. Main options and guarantees embedded in French investment contracts with discretionary participation features Options Surrender Policyholders are allowed to surrender their contract before maturity. Surrender may occur on part of the contract s invested assets or on the whole contract. In some countries, surrender penalties may be levied by the insurer, however, this is not the case for BNP Paribas contracts in France [see focus opposite]. Scheduled / unscheduled additional premiums Policyholders are allowed to pay additional premiums on existing contracts at any time. Such payments may be scheduled (from contract inception or at a subsequent date). However, most additional premiums are not scheduled. Conversion Policyholders may decide to convert the contract s surrender value into annuities. Depending on contractual features, the conversion rate may be defined at the inception of the contract or at the time the option is exercised. Switches Policyholders are allowed to switch, during the life of the contract, from the insurer s general fund and unit-linked assets as well as from unit-linked assets to the general fund, or between unitlinked assets. Guarantees Guaranteed Minimum rate Policyholders are entitled to a minimum crediting rate on the component of the contract invested in the insurer s general fund (i.e. excluding the unit-linked component). Guaranteed Minimum Death Benefit GMDB Unit-linked contracts may include an additional guarantee triggered by the death of the policyholder. This GMDB guarantees that the contract s beneficiary receives, as a minimum, premiums invested by the policyholder even when cumulated premiums exceed the value of unit-linked assets at the time of death. Focus on surrender options a financial option triggered by policyholder behaviour and moderated by the insurer s actions The surrender option is akin to a swaption, the value of which increases when interest rates rise. However, this option is closely related to other non-financial contract features the insurer s actions as well as policyholder behaviour. The insurer s discretionary decisions on the crediting rate high crediting rates reduce the probability of the option being exercised. Policyholder behaviour is considered in the design of the contract based on expected surrender rates. However, policyholders decisions are not always based on economic rationality. For instance, low crediting rates distributed by the insurer may reduce the amount of new / additional premiums but not trigger surrenders on existing contracts (as seen in 2012 in France). Similarly, massive surrenders ( insurance runs ) were not observed in times of financial crises but may occur when policyholders cast doubt on an insurer s solvency even if such doubts are not backed by fact. Further, a mix of measurement approaches will be used instead of a single measurement approach for the contract taken as a whole. Insurers will encounter extreme difficulties in providing rationale with this piecemeal approach. BNP Paribas advocates a measurement model that reflects the interaction between assets and insurance liabilities for participating contracts and eliminates accounting mismatches. We recommend that the Board overhauls the detailed proposal of the exception to measurement and presentation for these contracts ( mirroring approach ) so as to avoid an arbitrary split of cash flows. The contractual service margin should be adjusted for changes in the valuation of underlying assets, as the insurer s expected profit is changed accordingly. 4 / 13

5 Revenue presented in the statement of profit or loss should be relevant for preparers and other users of the financial statements The definition of revenue proposed by the IASB is artificial and is not the aggregate commonly used by management or requested by users of the financial statements to date. Information usefulness should be carefully assessed with preparers and other users of financial statements. BNP Paribas supports the summarized margin approach as developed in the 2010 ED along with volume information on premiums written and claims paid presented in the notes to the financial statements. Specific presentation and consolidation exemptions should apply to assets held for unit-linked contracts The IASB proposal allows an entity not to derecognize its own financial liabilities and deduct its own shares from equity when they are included in unit-linked funds. It also allows the share of interest in owner-occupied property underlying unit-linked contracts to be measured at fair value through profit or loss. This is consistent with the perfect matching of assets with liabilities required from such contracts. It avoids obscuring financial reporting with presentation mismatches between assets and liabilities that have no economic substance. However, the implementation of the mirroring approach principles to these contracts turns out to be unclear to many constituents, resulting in diverging interpretations of the requirements. The FASB has developed a proposal that requires the classification of assets at fair value through P&L for segregated funds as well as presentation of assets on a separate line item on the face of the balance sheet. Their model also provides for consolidation exemptions for investments funds backing insurance contracts. This approach is more consistent with the respective obligations of policyholders and insurers and provides more useful information to users with simple and obvious evidence of existing (or lack of) mismatches between assets and liabilities. This proposal is also relevant for other unit-linked contracts that do not meet the definition of segregated funds. BNP Paribas supports supplementing the current approach with the FASB proposals, the scope of which should be extended to unit-linked contracts. As a result, we call for an alternative approach that allows for a true and fair transcription of the insurer performance. As our contract obligations and the operating results used internally and externally for performance management rely on cost information, we believe that a cost based approach is relevant to our business model. Insurance fixed-income assets, representing a large part of our investment portfolio, are mostly recovered through contractual interests and redemption of nominal rather than through disposal at a gain or loss. Similarly, insurance liabilities are commonly fulfilled over time rather than transferred to a third party. In this respect, the insurance contract standard should refer back to the business model like IFRS 9, and permit cost measurement for insurance contract obligations that will be fulfilled. However, should the Board maintain its view on current measurement principles, we support a model where short-term market changes impacting the value of assets and insurance liabilities do not impact profit or loss when they eventually unwind. Such short-term market changes hamper proper understanding by management and investors of the operating performance of insurance activities. 5 / 13

6 Accordingly, the contractual service margin should be adjusted to reflect the insurer s expected profit. IFRS 9 should also be modified so that all assets backing insurance contract liabilities, including derivatives, are eligible for measurement at fair value through OCI. It is critical for us that the model be revised to meet the following fundamental principles that ensure the relevance of financial reporting for users: the statement of profit or loss should reflect results that are relevant to the operating performance of the insurer; intergenerational mutualisation between contracts in an open portfolio should be considered in the measurement of insurance contracts, and no computation by generation should be performed; where asset-liability management actively considers future new business and is efficient in matching cash flows of assets and liabilities, no accounting volatility should be reported in profit and loss nor in OCI; the wording of the final standard should be based on sound principles and avoid unnecessary complexity that does not add value to users, whether financial analysts or management, with clear, understandable wording. Clear drafting of financial reporting principles is needed to facilitate the users understanding of IFRS information and comparisons with other financial information issued by insurers, such as Solvency 2 or Market Consistent Embedded Value based on the CFO Forum principles. If the standard leads to financial information that cannot be easily explained and commented on, it will be useless. The effective dates of IFRS 4 phase 2 and IFRS 9 should be aligned to ensure the clarity of financial information and a level playing field for insurers Financial assets represent an essential part of our investments. Successive rounds of deep changes in accounting principles for financial assets and insurance contracts would be detrimental to users understanding of our financial position and performance and could ultimately turn investors away from the insurance industry. As the Board decided recently to defer the implementation of IFRS 9 to an unspecified date, BNP Paribas expects that the IASB aligns the effective dates of the insurance and financial instrument standards. Aligning effective dates will ensure a level-playing field for all issuers of financial statements. If the standards become effective at different dates, financial conglomerates should not be put at a competitive disadvantage if insurance companies can delay IFRS 9 implementation to match the effective date of the insurance contract standard. Insurance companies within financial conglomerates should also be allowed to defer the application of IFRS 9. Extensive fieldwork to test the proposals is needed The proposed requirements include major changes to financial reporting for insurance contracts. We expect that the magnitude of these changes is more complex and costly than the impact of the first time application of IFRS in 2005, all the more so as these proposals are still widely untested in practice at this stage. 6 / 13

7 The implementation of the Solvency 2 prudential regime has implied six rounds of quantitative impact studies, still undergoing, conducted by EIOPA. They have allowed for subsequent improvements before the regime is finalized. Similarly, for the IASB s revised proposal and for the alternative models that are currently being discussed, it is essential that a comprehensive understanding is gained by all market players, to ensure that the proposals will not have unintended consequences and are workable operationally. Obtaining meaningful results from field testing within the limited time available in the current exposure draft comment period is not possible. The three year implementation period prior to the effective date of the standard is also not the appropriate time to perform such field testing. BNP Paribas expects to incur prohibitive costs to implement such changes in accounting principles, as new information needs to be prepared and reporting systems must be reconfigured, compared to the expected benefits. We ask for a thorough cost-benefit analysis to be performed after the field tests. You will find further details on the above comments in the answers to the questions posed in the ED in Appendix A to this letter. We would also like to bring the Board s attention to other technical issues described in appendix B to this letter. If you have any queries regarding our comments, we would be pleased to discuss them further. Sincerely, Lars Machenil 7 / 13

8 Appendix A Question 1 Adjusting the contractual service margin Do you agree that financial statements would provide relevant information that faithfully represents the entity s financial position and performance if: a. differences between the current and previous estimates of the present value of future cash flows related to future coverage and other future services are added to, or deducted from, the contractual service margin, subject to the condition that the contractual service margin should not be negative; and b. differences between the current and previous estimates of the present value of future cash flows that do not relate to future coverage and other future services are recognised immediately in profit or loss? Why or why not? If not, what would you recommend and why? As our contract obligations and the operating results used internally and externally for performance management are based on cost information, we believe that a cost based approach is relevant to our business model. Insurance fixed-income assets, representing a large part of our investment portfolio, are mostly recovered through contractual interests and redemption of nominal rather than through disposal at a gain or loss. Similarly, insurance liabilities are commonly fulfilled over time rather than transferred to a third party. In this respect, the insurance contract standard should refer back to the business model like IFRS 9, and permit cost measurement for insurance contract obligations that will be fulfilled. However, should the Board maintain its view on current measurement principles, we agree that the contractual service margin should be adjusted for changes in estimates of future cash flows related to future coverage and other future services and that it cannot be negative. We supported this proposal in our answer to the 2010 ED. We consider that the contractual service margin corresponds to the unearned profit (risk adjusted) of the insurance contract. Adjusting the contractual service margin will provide relevant information on changes in expected profit. We believe that the contractual service margin should also be adjusted for changes in the risk adjustment relating to future coverage and other future services. This would ensure consistent treatment between changes in the risk adjustment and other changes in estimates of future cash flows. We do not expect significant operational difficulties in assessing the impact of such changes. In addition, for participating contracts, we consider that crediting benefits to policyholders is a service rendered by insurer. Changes in the valuation of underlying assets that impact the amount of future cash flows to policyholders, i.e. paying higher or lower participation benefits, should adjust the contractual service margin as those changes also impact the insurer s unearned profit. The initial computation and subsequent amortization of the contractual service margin should not be performed by generation. The intergenerational mutualisation between contracts in an open portfolio is a fundamental characteristic of insurance and should be reflected in the measurement of insurance contracts. We disagree with the ED s proposal to release the contractual service margin over the insurance coverage period only. We recommend that the margin be released over both the coverage and the claim-handling periods as performance under the contract includes both providing insurance coverage and handling 8 / 13

9 claims during or after the coverage period. The ED is not clear on the treatment of favorable changes in future cash flows when the contractual service margin has been exhausted in prior periods and a loss has been recognized. Favorable changes in future cash flows should be recognized in profit to the extent of the loss recorded in prior periods, with only the excess amount being accounted for as a positive contractual service margin. Question 2 Contracts that require the entity to hold underlying items and specify a link to returns on those underlying items If a contract requires an entity to hold underlying items and specifies a link between the payments to the policyholder and the returns on those underlying items, do you agree that financial statements would provide relevant information that faithfully represents the entity s financial position and performance if the entity: a. measures the fulfilment cash flows that are expected to vary directly with returns on underlying items by reference to the carrying amount of the underlying items? b. measures the fulfilment cash flows that are not expected to vary directly with returns on underlying items, for example, fixed payments specified by the contract, options embedded in the insurance contract that are not separated and guarantees of minimum payments that are embedded in the contract and that are not separated, in accordance with the other requirements of the [draft] Standard (ie using the expected value of the full range of possible outcomes to measure insurance contracts and taking into account risk and the time value of money)? c. recognises changes in the fulfilment cash flows as follows: i. changes in the fulfilment cash flows that are expected to vary directly with returns on the underlying items would be recognised in profit or loss or other comprehensive income on the same basis as the recognition of changes in the value of those underlying items; ii. iii. changes in the fulfilment cash flows that are expected to vary indirectly with the returns on the underlying items would be recognised in profit or loss; and changes in the fulfilment cash flows that are not expected to vary with the returns on the underlying items, including those that are expected to vary with other factors (for example, with mortality rates) and those that are fixed (for example, fixed death benefits), would be recognised in profit or loss and in other comprehensive income in accordance with the general requirements of the [draft] Standard? Why or why not? If not, what would you recommend and why? We strongly disagree with this proposal. We believe that the objective of reflecting the interaction between assets and liabilities for contracts with participating features should be maintained, but that the current proposal must be overhauled as: the proposed treatment is overly complex, leading to possible inconsistencies in practical implementation of the standard. Indeed, the Board erroneously assumes that cash flows on options and guarantees can be identified and assessed in isolation from other contractual cash flows. The mirroring approach requires an artificial split of these contracts into three pieces with an arbitrary breakdown of the contract s cash flows which the Board acknowledges in BC 130. This split is inconsistent with the way the contract is priced, sold and subsequently managed, i.e. as a bundle of rights and obligations; 9 / 13

10 the mirroring approach implies a mix of measurement instead of a single measurement for the contract taken as a whole. Insurers will encounter extreme difficulties in providing rationale with this piecemeal approach; the mirroring approach is not adapted to French participating contracts (see additional information below), whereby policyholder participation is based on realised investment returns rather than on changes in the fair value of the underlying assets, whereas the Board had specifically analysed these contracts. The measurement and presentation exemption for participating contracts has little use if cash flows arising from the participation feature are measured under the building block approach as they do not vary directly with the underlying items because of the insurer s discretion over the timing of asset disposals and related realised investment gains. Key features of French investment contracts with discretionary participation features All contracts participate in the insurer s pool of assets ( general fund ), except for their unit-linked component. Typical contract duration exceeds 8 years, being the minimum time period the policyholder has to hold the contract for its proceeds to be tax free. Active asset-liability management techniques are used for investments in the general fund not in a closed book perspective, but on the contrary, in an open book perspective taking into account future new business assumptions (i.e. new premiums on contracts in force and new contracts). Active asset-liability management aims at maximising the crediting rate to policyholders over the long term and mitigating the effects of short term volatility. The participation benefit account is based on realised investment income of the whole general fund. It does not include unrealised gains on underlying assets. The insurer has discretion over the following items: - amount of gains or losses to be realised; - overall amount of participation benefits allocated to policyholders, considering minimum regulatory and contractual obligations; - timing of allocation of the overall amount of participation benefits to individual policyholders - the overall amount must be allocated within 8 years to individual contracts in force at the date the participation benefit is allocated. Question 3 Presentation of insurance contract revenue and expenses Do you agree that financial statements would provide relevant information that faithfully represents the entity s financial performance if, for all insurance contracts, an entity presents, in profit or loss, insurance contract revenue and expenses, rather than information about the changes in the components of the insurance contracts? Why or why not? If not, what would you recommend and why? We disagree with the IASB proposal on insurance contract revenue and expenses. The definition of revenue proposed in the ED, based on the expected pattern of claims and benefits, is artificial and cannot be easily reconciled to tangible elements such as the premium written or cash received. This definition of revenue is not commonly used by our management or requested by users of the financial statements. Furthermore, although separation of non-distinct investment components from the host insurance contract would be deemed impossible in the unbundling analysis, such investment components would have to be separated for the calculation of revenue. We believe that the separation would in essence be arbitrary. BNP Paribas supports the summarized margin approach as developed in the 2010 ED along with disclosures of volume information on premiums written and claims paid. 10 / 13

11 Question 4 Interest expense in profit or loss Do you agree that financial statements would provide relevant information that faithfully represents the entity s financial performance if an entity is required to segregate the effects of the underwriting performance from the effects of the changes in the discount rates by: a. recognising, in profit or loss, the interest expense determined using the discount rates that applied at the date that the contract was initially recognised. For cash flows that are expected to vary directly with returns on underlying items, the entity shall update those discount rates when the entity expects any changes in those returns to affect the amount of those cash flows; and b. recognising, in other comprehensive income, the difference between: i. the carrying amount of the insurance contract measured using the discount rates that applied at the reporting date; and ii. the carrying amount of the insurance contract measured using the discount rates that applied at the date that the contract was initially recognised. For cash flows that are expected to vary directly with returns on underlying items, the entity shall update those discount rates when the entity expects any changes in those returns to affect the amount of those cash flows? Why or why not? If not, what would you recommend and why? We disagree with the proposal as it erroneously suggests that the statement of profit or loss would faithfully reflect underwriting performance merely by recording the effects of changes in discount rates in comprehensive income Recognizing the impact of changes in interest rates on insurance contract liabilities in other comprehensive income does not avoid accounting mismatches. Accounting mismatches would arise if interest sensitive assets such as bonds are carried at amortised cost or at fair value through profit or loss, whereas the effect of changes in discount rates on insurance liabilities is presented in OCI. We believe that financial assets and insurance liabilities should be measured on a consistent basis, based on asset-liability management practices. If the current measurement principle for insurance contract liabilities is carried forward to the final standard, IFRS 9 should be modified so that all assets backing insurance contract liabilities, including derivatives, are made eligible for measurement at fair value through OCI. Question 5 Effective date and transition Do you agree that the proposed approach to transition appropriately balances comparability with verifiability? Why or why not? If not, what do you suggest and why? Retrospective application We agree with the proposed approach to transition. We advocated the retrospective application in our answer to the 2010 ED, resulting in the recognition of a contractual service margin on existing contracts. Effective date We ask the Board to align the effective date of the insurance contract standard with the effective date of IFRS 9. Implementing two key standards for the insurance industry at different dates would hinder comparability of the financial statements over time by requiring the presentation of pro-forma analyses over an extended period, and eventually deter investors from groups with significant insurance activities. 11 / 13

12 Aligning effective dates will ensure a level-playing field for all issuers of financial statements. If the standards were to be effective at different dates, financial conglomerates should not be put at a competitive disadvantage if insurance companies can delay IFRS 9 implementation to match the effective date of the insurance contract standard. Insurance companies within financial conglomerates should also be allowed to defer the application of IFRS 9. Question 6 The likely effects of a Standard for insurance contracts Considering the proposed Standard as a whole, do you think that the costs of complying with the proposed requirements are justified by the benefits that the information will provide? How are those costs and benefits affected by the proposals in Questions 1 5? How do the costs and benefits compare with any alternative approach that you propose and with the proposals in the 2010 Exposure Draft? Please describe the likely effect of the proposed Standard as a whole on: a. the transparency in the financial statements of the effects of insurance contracts and the comparability between financial statements of different entities that issue insurance contracts; and b. the compliance costs for preparers and the costs for users of financial statements to understand the information produced, both on initial application and on an ongoing basis. The proposed requirements include major changes to financial reporting for insurance contracts. We expect that the magnitude of these changes is more complex and costly than the impact of the first time application of IFRS in 2005, all the more so as these proposals are still widely untested in practice at this stage. The implementation of the Solvency 2 prudential regime has implied six rounds of quantitative impact studies, still undergoing, conducted by EIOPA. They have allowed for subsequent improvements before the regime is finalized. Similarly, for the IASB s revised proposal and for the alternative models that are currently being discussed, it is essential that a comprehensive understanding is gained by all market players, to ensure that the proposals will not have unintended consequences and are workable operationally. Obtaining meaningful results from field testing within the limited time available in the current exposure draft comment period is not possible. The three year implementation period prior to the effective date of the standard is also not the appropriate time to perform such field testing. BNP Paribas expects to incur prohibitive costs to implement such changes in accounting principles, as new information needs to be prepared and reporting systems must be reconfigured, compared to the expected benefits. We ask for a thorough cost-benefit analysis to be performed after the field tests. Question 7 Clarity of drafting Do you agree that the proposals are drafted clearly and reflect the decisions made by the IASB? If not, please describe any proposal that is not clear. How would you clarify it? As noted above, the analysis of the principles as currently worded in the ED proved extremely difficult in some areas, notably for contracts with participating features that constitute our main business. 12 / 13

13 Appendix B In addition to the comments presented in the cover letter and the detailed comments on the questions asked by the IASB in the ED, we wish to highlight the following issues: we support the ED proposals with regards to: o the explicit risk adjustment required in paragraph 27 and separate contractual service margin. Explicit risk adjustment is common practice for insurers, both for internal and regulatory reporting. It provides greater transparency on the true position of a contract whereas a single composite margin does not distinguish profitable contracts from risky contracts. Furthermore, a composite margin fails to show changes in risks or in the price of bearing risks occurring while the contract is in force, as the margin is not remeasured subsequent to initial recognition. o the scope exception for financial guarantee contracts in paragraph 7 f Financial guarantees have the attributes of both insurance contracts, transferring risks to another party, and financial instruments, the risk transferred often being credit risk. The election permitted under the proposed insurance contract standard better reflects the entity s business model and risk management practices. we disagree with the proposals on disclosures as the overall volume of required disclosures is likely to obscure the information conveyed. Furthermore, we do not agree on the need to disclose the confidence level to which the risk adjustment corresponds. This method may be inappropriate for some types of contracts where the probability distributions are highly skewed. Comparability of information will also be limited as users will not be in a position to reconcile diverging confidence levels. 13 / 13