Mr Hans Hoogervorst Chairman International Accounting Standards Board (IASB) 30 Cannon Street London EC4M 6XH United Kingdom.

Transcription

1 Mr Hans Hoogervorst Chairman International Accounting Standards Board (IASB) 30 Cannon Street London EC4M 6XH United Kingdom 21 October 2013 Revised Exposure Draft Insurance Contracts Dear Mr Hoogervorst The Swiss Insurance Association (SIA) would like to take the opportunity to respond to the questionnaire on the revised IASB Exposure Draft Insurance Contracts (the ED ). The SIA represents Swiss insurance companies including subsidiaries and branches of foreign companies in Switzerland representing 95 % of the premium volume written by insurers based in this country. The SIA comments were prepared by the Commission for Accounting and Reporting which is made up of leading finance and accounting executives from various companies including all large and listed companies. The IFRS Framework is extremely relevant in Switzerland as the Swiss Stock Exchange requires the application of either IFRS or US GAAP from all companies listed in the main segment. In this respect, content and discussions about IFRS 4 Insurance Contracts, Phase II are of utmost importance to the Swiss insurance industry. In the appendix to this letter you will find our detailed responses to the questions raised in the ED. At this point we just would like to highlight some of the concerns we have with the current ED. The IASB addresses many of the concerns of the insurance industry as expressed in response to the 2010 ED. Ironically; it is these amendments that make the new ED much more complex than its predecessor. The mirroring approach in particular adds complexity but does not eliminate mismatches. The conceptual shortcomings of this approach actually entail new opportunities for mismatches and, in addition, make the realisation overly complex. A possible alternative was discussed with Stephen Cooper and Andrea Pryde on 1 October 2013 at the roundtable in Zurich. You will find this alternative outlined in our response to question 2. Schweizerischer Versicherungsverband SVV C. F. Meyer-Strasse 14 Postfach 4288 CH-8022 Zürich Zentrale +41 (44) Fax +41 (44)

2

3 Appendix The comments included in this Appendix are focusing on the specific questions raised in the ED and implementation issues on the topics subject to re-exposure. Responses to the questions raised in the Exposure Draft 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 differences between the current and previous estimates of the present value of future cash flows 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? The Swiss Insurance Association believes that the contractual service margin represents the unearned profit in an insurance portfolio. Consequently, we agree with the ED proposal that differences between current and future estimates of cash flows should be added to, or deducted from, the contractual service margin if those changes relate to future coverage or services provided that the margin does not become negative. We believe that the contractual service margin representing the unearned profit minus the changes in estimates of the risk adjustment associated with future coverage provides useful and relevant information regarding the entity s financial position and performance. We also believe the ED proposal is consistent with how the margin is determined at inception. Adjusting the contractual service margin for the changes in estimates referred to above would provide a faithful representation of the remaining unearned profit, as these changes affect the future profitability of the contracts. Such accounting would also avoid counterintuitive results of immediate recognition of adverse changes in estimates when contracts are profitable. The adjustment of the contractual service margin allows for measuring the future portfolio profitability, taking into account any up-to-date estimates. We therefore view the ED proposal to adjust the contractual service margin as a suitable way of providing relevant and faithful information that also represents the company s latest estimates on future profitability. Without the adjustment of the contractual service margin, the recognised margin may well result in a reported portfolio profitability that differs substantially from what we would intuitively expect in terms of future profitability e.g. by far too high a profitability in cases where adverse changes in estimates were recognised through Profit or Loss in earlier periods making it impossible to compare existing business with new business profitability.

4 With the ED proposal to adjust the contractual service margin, the risk of stakeholders misinterpreting the release of the contractual service margin and the resulting false expectations around future business profitability is greatly reduced. We acknowledge that the distinction between differences in estimates that relate to future coverage and experience adjustments relating to past coverage may be complex in practice. 2

5 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 (i.e. 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 understand that the IASB conceived the mirroring approach in order to eliminate accounting mismatches something we very much appreciate, as it is consistent with our view that accounting mismatches should be avoided. However, as a consequence of setting up the proposed requirements, entities would need to distinguish between the following different sets of cash flows for measurement purposes: cash flows varying directly with underlying items indirectly varying cash flows and fixed cash flows. This split will result in some of the insurance liability being measured under the general measurement requirement and some on a basis that is driven by the measurement of the underlying items. We have serious conceptual concerns with this proposed approach: The provision to post effects caused by changes in discount rates for indirectly varying cash flows to Profit or Loss is not only inconsistent with the general measurement requirement, it also creates new opportunities for accounting mismatches. We believe that the split of cash flows is not consistent with the key assumption that the insurer should measure the insurance contract in a way that portrays a current assessment 3

6 of the combined package of cash inflows and cash outflows generated by all the elements contained in the contract. Applying the proposals would lead to effects of changes in the discount rates for similar contracts or even for the same contract (i.e. due to the split in the cash flows), partly recognised in other comprehensive income and partly in the Profit or Loss. As well as being difficult to understand, these changes would make it difficult to compare contracts with similar features. In addition to these conceptual concerns, we are seriously worried about the complexity that the requirement to split cash flows would add to an already complex measurement approach for insurance liabilities. Managing this would necessitate costly adjustments to processes and IT systems. Although the proposed approach may eliminate certain accounting mismatches, we cannot support the IASB s proposal, as the severe conceptual shortcomings, together with a significant increase in complexity, outweigh any benefits. We believe that the central objective of an accounting approach which aims to eliminate accounting mismatches between insurance liabilities and related financial assets should not be restricted through limited application and excessive operational complexity. Therefore, we recommend the introduction of a broader and principle based approach encompassing all contracts that entail both: substantial sharing of investment results with current and future policyholders by contract or statute and an unbiased segregation of a pool of assets subject to substantial policyholder participation. We believe that conceptually, the degree or form of policyholder participation in investment results should not lead to different accounting results. The fact that the majority of realised and unrealised investment results (80 to 100 per cent) is attributed to current and future policyholders indicates that the rights to manage the underlying pool of assets have been delegated to the insurer, subject to certain restrictions or guaranteed returns. In return, the insurer is entitled to either an explicit or implicit service fee. The pool of assets should be accounted for on the same measurement basis, at fair value, and reflected in the measurement of the insurance liability whereby the portion of unearned future results attributable to the shareholders should be reflected in the contractual service margin. If the participation of the policyholder is subject to a floor, this should be appropriately reflected in the estimated cash flows within the building block measurement. The contractual service margin should be released so that the underwriting result of the reporting period reflects an appropriate pattern of transfer of services. In the disclosure, the periodic changes in the contractual service margin should be decomposed. Discount rate for cash flows varying with the returns on underlying items We support the IASB s proposal in paragraph 26(a) of the ED that to the extent which the amount, timing or uncertainty of the cash flows arising from an insurance contract are dependent on the returns on underlying items, the discount rate used to measure those cash flows shall reflect the extent of that dependence. We agree that this should be the case, regardless of whether the relationship arises because the entity has discretion over the amount and timing of payments in any given period, or expects to pass on returns on underlying items. In both cases, the cash flows are expected to vary with returns on underlying items. 4

7 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? In our comment letter in response to the 2010 Exposure Draft, we said that volume information such as premiums and claims needs to be presented on the face of the income statement. While we appreciate the efforts the IASB has made to move towards a more traditional approach including revenue, claims and cost information we still have concerns about the usefulness, relevance and understandability of the approach proposed in the current Exposure Draft. The revenue term as proposed may be theoretically sound, as it presents insurance revenue in line with services rendered / insurance coverage provided, and is consistent with revenue recognition concepts included in the proposed revenue recognition standard. However, it is an artificial metric which, in our opinion, is not intuitive and therefore very difficult for both internal and external stakeholders to understand. What makes it counterintuitive is the concept for insurance income as used by the ED, which basically is a cost plus margin approach. Premiums received are currently an important volume measure and this key performance indicator is completely absent. More importantly, the accounting should follow the business model. Insurance is based on an underwriting process that sets premiums, receives them from customers and later pays claims and benefits, depending on the outcome of risk. We believe it is imperative for the income statement to calculate revenue using a top down rather than a bottom up (cost plus margin) approach. This way, the business model is properly reflected and premiums received are incorporated, providing meaningful and understandable information. We are sure there are alternative ways to present revenue incorporating information on premiums received without compromising the valuation approach proposed by the ED. Furthermore, the concept of premium or gross revenue is necessary to managing the business. Sales, growth and consequently the efficiency of the distribution channel are all measured through this metric. The sales force cannot be assessed on a measure built on expected cash flows and a margin, as they cannot relate this to their sales activities. This does not mean that margin or profitability analyses are not important for the sales channel, but the industry needs a measure of volume, based on what it receives from the customer. In addition to this more conceptual issue, we have other concerns that make it impossible for us to support the proposed approach for presenting insurance contract revenue and expenses: For many insurance policies, the investment components are not distinct but are highly interrelated as defined in paragraph B32 of the Application Guidance. For these types of insurance contracts there would be no unbundling for measurement of the insurance liability, but disaggregation would still be required for presentation in the profit and loss statement. Due to the high level of interrelation in certain types of contracts, we believe it is too burdensome and operationally complex to separate interrelated cash flows and exclude them from insurance contract revenue and incurred expenses. We believe that the current proposals do not meet the cost/benefit criteria and would be demanding to calculate in practice, while the tracking of different constituents of the revenue measure will add additional complexity for preparers and may be costly to implement. 5

8 Additionally, we do not see a convincing reason why the revenue as presented by an insurance company should be comparable to the revenue of other industries operating with long-term contracts. Insurance is a specialised industry with its own well-established characteristics and terminologies that are understood by stakeholders. We maintain the request already made in our comment letter responding to the 2010 Exposure Draft that it should be possible to present volume information such as gross written premiums and claims on the face of the income statement, as we consider this information critical to understanding the business and performance of an insurer. 6

9 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? Regarding the presentation of interest expense in the financial statements, we agree with the IASB s proposal to segregate the effects of the underwriting performance from the effects of the changes in discount rate in the insurance contract liabilities. However, we are concerned that the IASB s proposal in the ED, combined with the classification and measurement requirements in other standards, is not helpful in eliminating accounting mismatches and would result in reporting the insurance performance split across Profit or Loss and OCI. In the context of the ED Classification and Measurement: Limited Amendments to IFRS 9, the proposals are expected to reduce accounting mismatches if financial assets are both managed with the hold and sell business model and result in payments of principal and interest only. In those cases, they would be measured at FV-OCI. However, if financial assets are managed under a different business model or do not qualify for FV- OCI due to their contractual cash flow characteristics e.g. equity instruments, derivatives, some hybrid contracts and non-financial assets such as investment properties a mismatch will still arise, either in OCI (if the assets are measured at amortised cost) or in both OCI and Profit or Loss (if the assets are measured at FV-PL). We believe financial reporting requirements should help to depict an entity s business model. Therefore, to present relevant information about the insurance performance, it is, in our opinion, essential to report changes in the insurance liabilities consistently with how changes in the related assets are reported. We strongly suggest that entities should be allowed to opt for an approach in which the effects of changes in the interest rate are charged to Profit or Loss to better represent the underlying business model. This should be allowed if the assets underlying the liabilities are allocated to the FV-PL measurement class according to IFRS 9. Maintaining the approach proposed in the ED would virtually prevent the insurer from investing in asset categories (e.g. shares) for which the FV-OCI measurement class is not available as mismatches with the underlying insurance liability would result. As an alternative, or in addition, the IASB could extend the scope of the use of OCI to cover a broader range of assets other than debt instruments that meet the contractual 7

10 characteristics and business model tests as proposed in the limited amendments to IFRS 9 that relate to insurance liabilities. In order to further reduce accounting mismatches, it is important to increase flexibility, either by adopting a "fair value option" for insurance liabilities in IFRS 4, or by opening the FV-OCI measurement in IFRS 9 to other instruments. This request for more flexibility is the consequence of the IASB s proposal in the ED, especially in terms of how changes to requirements in the insurance liabilities resulting from changes in current market rates are recognised in OCI. Equally importantly, the proposal states that estimates of the discount rates shall be updated to reflect the dependence of an insurance liability on the underlying investments - those underlying items are not only debt instruments that qualify for the use of OCI. Furthermore, we would like to express major concerns about the increased complexity that would arise due to the provision to apply different discount rates to the same contract because of the requirement to split the interest expense in OCI or Profit or Loss. A number of members expressed major concerns about the application of historical discount rates. This significantly increases the number of portfolios, as each closing date creates an additional subportfolio with its own historical discount rate, resulting in a new subportfolio per closing date to be carried forward. Assuming quarterly closings, this would mean four new subportfolios for each year and portfolio since establishment, even when the characteristics of risk and pricing qualify it as a single portfolio. This will have a significant impact on the complexity of the measurement, as well as on the amount and granularity of data to be sourced from technical systems, processed and then held in specific subledgers and data warehouses. Each entity would have to collect and archive all the necessary information, including the assigned historical discount rate and the related cash flow information for each subportfolio. The entities would also have to perform many repeated calculations e.g. using historical rates as well as discount rates from the balance date. We are not convinced that complexity of the model and the challenging system requirements are justified by the benefits that the information will provide. While we believe the provided information is useful, we strongly recommend that the Board allows for a simpler approach. 8

11 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? Transition approach We agree with the proposed modified retrospective approach that would require entities to estimate the residual margin on transition using specified simplifications. Such an approach would allow insurers to report a potentially significant part of the profits on existing contracts through Profit or Loss, and would enhance comparability between the results of existing and new business. We assume that in many circumstances, entities will be able to make a reasonable estimation of the remaining contractual service margin based on historic public and internal information about the various portfolios e.g. embedded value calculations and actuarial assumptions specified in the technical descriptions of the insurance contracts. Assuming proper documentation on transition, we therefore do not expect any issues with the verifiability of estimates for regulators and auditors. Implementation period The insurance industry will need a sufficient time period for implementation. Therefore we propose an implementation period of five years. This request is driven not only by IT requirements and resource constraints, but also by the fact that the proposed approach is likely to have a significant impact on the operational management of an insurance company. Therefore it is imperative for the management to have a detailed understanding of how the accounting regime impacts on the business model as a whole, and on the way the business is controlled. The time needed for this must not be underestimated. We would like to substantiate our request further, as follows: The valuation and disclosure requirements stipulated by the current exposure draft have a significant impact on the amount and granularity of data to be sourced from technical systems, processed and then held in specific subledgers and data warehouses. Consequently, the implementation of the new requirements is likely to trigger major adjustments to technical systems and enhancements to existing data warehouses. We also expect that most of our members will need to implement a specific subledger for insurance accounting in order to cope with the requirements. Subledgers for insurance accounting are still being developed, which means there is no offthe-shelf system on the market at the moment. The evaluation, conception and realisation including group-wide roll out of such a major implementation project as the introduction of a subledger could take years. It should also be considered that many insurance companies would implement the same or similar systems in the same, relatively short, time period. This would be a significant drain on the market for expert external resources needed for this type of project, which could further delay progress. As indicated above, various minor and potentially major change projects to existing systems would also be necessitated on top of the major implementation project. This would stretch internal resources still further. The impact on the IT environment would take time and effort to resolve. As would the development of a solid knowledge base and training in accounting and actuarial departments, the dissemination of knowledge to management and investors, the 9

12 implementation of new processes, the development of new booking schemes, the definition and introduction of any new key performance indicators and more. Exacerbating the time constraint is the fact that all these things would need to happen more or less simultaneously. In mid-sized insurance companies there are limited resources available to dedicate to such a major project without compromising the day-to-day business. Building up the internal workforce also takes time, as knowledgeable accountants and actuaries are difficult to find. In addition, it would not be sufficient to have everything up and running at effective date. In order to ensure an orderly transition, all systems and processes would need to be ready at least a year before effective date. This lead time is necessary not only to have comparative information ready for disclosure in financial statements, but also to help understand the new accounting regime and how it compares to the current approach, and for planning and budgeting purposes. A year of parallel operation of the two schemes is also important for management to become familiar with new performance indicators and develop an understanding of how the business can be controlled under the new regime. To be sure of a sound implementation process ensuring good data quality, timely readiness of the information and full compliance with the standard we would need a minimum of five years. If the final standard is released in 2014, the earliest possible effective date would be 1 January Anything earlier is likely to result in a quick and dirty solution with all the potential for errors, inaccuracies or misstatements that come with it. Bearing all this in mind, we must stress that the introduction of IFRS 4 Phase 2 is not a theoretical exercise. At effective date we need to have full assurance and confidence that the IFRS numbers we are going to produce and present are correct. In other major reporting developments such as Swiss Solvency Test or Solvency 2, regulators allow a certain leeway in the quality of reporting in the early years, giving entities time to correct errors and improve reporting over time. This is not possible with IFRS 4 due not just to our accountability towards our investors, but also to the legal and regulatory obligations that force us to be fully compliant with all relevant standards from the outset. Considering the massive changes in accounting, reporting and IT systems and the expected high volatility of results due to the complexity of the models and extensive use of parameters that IFRS 4 entails the risk of errors in the early years is high, even with a high level of commitment and resources. Given our very strict legal obligations under stock exchange rules, we consider that these risks are not acceptable without a sufficient period to introduce and become familiar with IFRS 4 before it goes live. Effective date of IFRS 9 We are of the opinion that IFRS 9 and the future insurance standard should have the same effective date. We believe that at the very least, there should be an exception for the insurance industry, allowing it to introduce IFRS 9 and IFRS 4 Phase 2 simultaneously. In order to enhance relevance and comparability of financial statements, it is important to make accounting policy decisions on insurance liabilities and the designation of financial instruments simultaneously. Both IFRS 9 and IFRS 4 Phase 2 will have a significant impact on the way our members report the performance of their core business, with a pervasive effect on the financial statements. In addition, the implementation of these standards in two separate steps would lead to significant one-off costs and would be a big operational burden. In the event it is impossible to have the same effective date for both standards, we believe there should at least be the option to fully redesignate and reclassify under IFRS 9 upon first application of the new insurance standard. 10

13 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. Comparison to the 2010 exposure draft In the proposed approach, the IASB addresses many of the concerns of the insurance industry, particularly in relation to Profit or Loss volatility and the presentation of financial performance on the face of the Income Statement, as expressed in response to the 2010 ED. Ironically, it is these very amendments that make the new ED so much more complex than its predecessor. The mirroring approach and the new approach for presenting revenue in particular involve additional complexity that we believe far exceeds the benefits of these amendments. Although the following changes also entail additional complexity, we support them in principle: The separation of results from underwriting and investment activities from the effects of changes in discount rates. In particular the proposed solution to recognise in OCI the effects of changes in discount rates makes high demands on the historization of interest curves and cash flows. The requirement to differentiate between cash flows relating to future services and experience adjustments relating to claims already incurred. Effect of the standard as a whole The proposed standard is likely to have a significant impact on the business model of our members. In our opinion, the main purpose of an accounting scheme is to depict and visualise an existing business model. We are therefore deeply concerned about the potentially significant impact the proposed standard may have on the business model of our members. We believe that the costs involved in implementing the provisions of IFRS 4 will be significant. As already presented in our answer to question 5, significant investments will be needed in the IT environment in order to achieve compliance with the proposed requirements. The way life business in particular is to be accounted for under the new IFRS 4 regime is completely different from the way it is under the current accounting regime. As furthermore it is very complex and abstract a major effort to train and inform staff, management, analysts, investors and other stakeholders will be required. We agree that the standard would result in a somewhat higher degree of comparability across the insurance industry than there is today. However, this comparability is, in our opinion, compromised by the many assumptions that have to be made in the proposed accounting approach that are to a large extent inherent in the valuation of insurance business. In addition, this increase in comparability is paid for dearly with a significantly increased level of complexity along with the similarly increased level of knowledge required to interpret the information. 11

14 We are unsure about the impact of the new requirements on transparency in financial statements. Some of the new provisions are certainly likely to enhance transparency e.g. the separation of investment and insurance components of the premium for income statement purposes or the disclosure of the service margin. On the other hand, the complex calculation methods, the introduction of new terminology (e.g. service margin), or an abstract revenue term do not help users to better understand insurance business. We are aware that today (life) insurance business is difficult to understand, particularly for external stakeholders such as investors and analysts. However, we do not believe that the proposed standard will change this considerably, despite some potential improvements with regard to comparability and transparency. On the contrary, we believe it is a highly complex and theoretical framework that would be difficult for internal and external stakeholders alike to understand. Taking everything into consideration, we think that the costs of complying with the proposed requirements are very high and we do not believe that the benefits will outweigh the necessary investments. 12

15 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? Illustrative Examples Overall we consider it very helpful to have illustrative examples available to aid in understanding the provisions of the standard. In our opinion however, many of the examples depicted in the Illustrative Examples section of the ED are oversimplified. In order to be properly relevant and helpful, the examples should not only cover some basic aspects of the requirements, but also illustrate those aspects that are more challenging to understand and realise. Additionally, we would appreciate having examples of all the valuation approaches presented in the ED. Additional Comments In addition to commenting on the specific questions raised in the ED, we would like to comment on the issues below: Premium allocation approach in general We strongly believe that there is no need to change the current accounting and reporting for nonlife business. The current accounting treatment for non-life (i.e. general insurance/property & casualty) business and related key performance indicators is well accepted and understood by both internal and external stakeholders unlike the life business, where investors are not easily able to understand the business from the current accounting model. There is a theoretical view that certain longer term policies could be reported better using a building block approach, but we feel that any benefits would be marginal. Indeed, we believe they would be outweighed by the risk that business which management and investors regard as fundamentally identical would have to be accounted and reported for differently simply because of certain bright line tests. We believe it is highly unlikely that contracts which do not meet the qualification for the premium allocation approach will give investors distorted information, simply because they are accounted for under the premium allocation approach. We believe that, presenting non-life business in two different formats because of such tests will lead to significant confusion amongst users. We therefore welcome, at the minimum, the premium allocation approach that allows for the application of an accounting scheme that is very close to current practice for non-life business, and we would strongly recommend that no changes except for discounting claims liabilities are made to the existing non-life accounting model. Premium allocation approach discount rate for insurance liabilities We understand that the premium allocation approach represents a reasonable approximation of the building block measurement as outlined in the paragraphs of the ED. Therefore, conceptually, using the same discount rate for the liability for remaining coverage and the liability for incurred claims is consistent. However, being mindful of the operational complexity that this would cause around administering the liability for incurred claims, we believe the final standard should permit an accounting policy choice to use accident year discount rates under the premium allocation approach. 13