International Accounting Standards Board

30 Cannon Street

London

EC4M 6XH

25 October 2013

AFM response on Exposure Draft- Insurance Contracts

  1. I am writing in response to this discussion paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
  • Comment on the revised draft, and highlight areas where we consider the proposals are problematic for mutuals.
  1. The Association of Financial Mutuals (AFM) represents 53 member companies, most of which are owned by their customers. Between them, AFM members manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £100 billion. The nature of their ownership and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of continued support and promotion. A number of AFM members are small, unincorporated societies, with different accounting rules.
  1. We recognise and welcome many of the amendments made by the IASB in response to industry concerns about the 2010 Exposure Draft. The revised document clearly owes much to effective dialogue with the industry, and in addition to the main targeted areas, shows welcome progress in clarifying some areas of concern and in improving the transparency of insurance accounting. As a number of our members are also members of the ABI and ILAG, we have not duplicated their views- though we largely support them. Our response therefore considers the revised draft only in relation to its impact on mutual insurers and friendly societies.
  1. Our general concern is that the ED gives little consideration to the position of mutuals; in particular, to how mutual capital (or working capital) might be presented, and of movements in it from one period to the next. Policyholders are viewed by default as “creditors”, reflecting the proprietary company model used as the basis for setting these standards. Similarly, the ‘investors’, in the context of paragraph OB2 of the conceptual framework, are the shareholders of the entity. In a mutual entity there are no shareholders and the ‘investors’ in this context are the participating policyholders. Hence for a mutual insurer the unallocated surplus takes on a heightened significance and the reporting of the performance and stewardship of the entity should properly reflect this.
  1. Paragraph B66 (k) includes within the liability cash flows of a contract: ‘Payments arising from existing contracts that provide policyholders with a share in the returns on underlying items (see paragraph 33), regardless of whether those payments are made to current or future policyholders’. As noted in the draft basis for conclusions (BCA62), for a mutual entity which issues contracts that provide policyholders with the right to participate in the whole surplus of the entity, the cashflows will include that surplus and hence there would be no equity and no profit reported in any period.
  1. We question whether accounts for mutual insurers prepared on this basis will provide useful information for their users. At any given balance sheet date (unless the insurer is no longer a going concern) there will be an amount of surplus within the participating fund that has not been allocated between participating policyholders. This ‘unallocated surplus’ is used by mutual insurers to meet regulatory capital purposes as well as to provide working capital. The management of the surplus is therefore of fundamental importance to the stewardship of a mutual insurer. Similarly, the balance of the unallocated surplus and the movement in the surplus in the period are key performance metrics.
  1. In the IASB’s conceptual framework, the objectives of financial reporting are to ‘provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity’ (OB2). It is difficult to see how accounts that will never show a profit or loss can fulfil this objective.
  1. We suggest allowing mutual or mutual type entities to present the unallocated surplus as a distinct liability, presented separately from the insurance contract liability on the face of the balance sheet. Similarly, the change in the value of the unallocated surplus should be presented as a separate line item on the face of the profit or loss account. This is broadly as per UK GAAP today.
  1. We acknowledge that this will introduce a presentational difference between mutual and investor-owned insurers, which contradicts the conclusion in paragraph BCA62 that: ‘The IASB has identified no reason to adopt different treatments for these contracts on the basis of the legal form of the issuer’. However, we believe that the difference in the ownership structure between mutual and investor-owned insurers, and the need to maintain usability of the accounts, justifies this presentational difference.
  1. On a different point, the new proposals pose a new level of complexity: having to split out contractual service margin and risk margin from cohorts of policies, and having to track them over time, that will require some considerable investment in systems, with consequent management and actuarial time to interpret. We do not consider that thesecosts will be outweighed by the benefits for smaller and less sophisticated entities. We suggest IASB might consider a more practical way of accounting for insurance entities that do not report on listed company markets and who do not require such detailed and sophisticated performance measures ongoing; in other words, an IFRS for SMEs on insurance.
  1. We would be pleased to discuss further any of the issues raised by our response.

Yours sincerely,

Martin Shaw

Chief Executive

Association of Financial Mutuals

AFM response to ED- Insurance Contracts / 1