A Practical Approach to Risk Margins in the Measurement of Insurance Liabilities for Property and Casualty (General Insurance) under Developing International Financial Reporting Standards

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) continue to debate and refine the financial reporting standards that will emerge from Phase II of their joint project on insurance contracts. The changes to the measurement of insurance liabilities for financial reporting are potentially quite significant for most insurance organizations around the world. The paper presents the authors’ views on practical approaches to consider in calculating risk margins in the measurement of insurance liabilities for property and casualty (also referred to as general insurance or non-life) insurance contracts. In particular, the paper focuses on the use of an approach to estimate risk margins that: (1) recognizes risk and uncertainty in the amount and timing of future payments needed to satisfy insurance liabilities; (2) reflects an objective assessment and measurement of risk for insurance liabilities and the price of risk in terms of the amount an insurer would rationally pay to be relieved of the insurance contract obligations that underlie such liabilities; and (3) provides useful financial information for users of IFRS financial statements.