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Rio de Janeiro, October, 25th, 2013
DIREX 105/2013
To: IFRS Foundation Publications Department
Ref: Comments on ED-2013/7 – “A Revision of ED 2010/8 – Insurance Contracts”
Dear Sirs,
CNseg, Brazilian National Confederation of General Insurance, Private Pension and Life, Supplementary
Health and Capitalization, welcomes the opportunity to comment on the Exposure Draft ED/2013/7 “A
Revision of ED 2010/8 – Insurance Contracts”, published by IASB in June, 2013.
CNseg is the relevant institutional representation of the Brazilian insurance market. The industry
revenue reached, in 2012, US$ 123.8 billion, total provisions of US$ 211.7 billion and consolidated
shareholders' equity of U.S. $ 55.9 billion. The 177 member companies of the confederation system
account for 75.7% of revenues and 97.2% of the provisions of the industry.
The proposal presented by IASB was evaluated by business professionals in the insurance industry with
extensive experience in actuarial, accounting and investments. The focus of the analysis were the main
changes in measurement approach, development of actuarial techniques, introduction of new
disclosures, the need for development and implementation of new operating systems and controls,
changes to the metrics for determining margins of products and especially about the impact on the
perception of investors, analysts and other stakeholders who use financial statements prepared in
accordance with IFRS for making decisions on an ongoing basis. Additionally, we have included in this
letter relevant comments on the interaction of the ED with other projects and efforts underway in the
Brazilian insurance market.
Following IASB guidance, our comments are being sent as answers to questions submitted in the draft.
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
Question 1 – Adjusting the contractual service margin
Do you agree that the 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 of 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 related to future coverage and other future services are recognized
immediately in profit or loss?
Why or why not? If not, what would you recommend and why?
Comment:
(a) Reviewing the recognition criteria proposed by ED - 2010/8, which established the recognition of
changes in the margin immediately in profit or loss, represents a breakthrough that should prevent
the occurrence of situations where the recognition of partial or full profitability expected for contract
in its pricing and underwriting is done immediately by the entities in situations where the risk of the
contract has not been partially or fully expired by the passage of time. We believe that the current
wording of the ED - 2013/7, which does not allow the entity to recognize a negative residual margin,
corroborates that artificial gains are not immediately recognized by insurers by changing
measurement criteria, in line with the objectives and requirements of other IFRS standards and
interpretations for revenue recognition and provisions. This could occur, substantially, in situations
where unfavorable changes in the determination of cash flows would result in a marked decrease of
such margin, as described in paragraphs 30 ( d ) (i ) and 30 ( d ) ( ii) of ED 2013/7.
(b) We agree with the general principles of paragraph 32 of the draft, that state that the margin shall
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
be recognized in profit or loss on a systematic basis, to reflect service delivery or expiration of the
contract risks. Regarding residual margin presentation, we believe that the segregation of different
components resulting from the measurement of residual service margin proposed by the ED is very
complex, both from a practical and operational point of view. We might cite, as examples, the
segregation of two different components. The first would be the effect of positive and negative
changes of the residual margin due favorable and unfavorable changes calculated in different periods
(covered by paragraph 30-a). The second item would be the impact resulting from the addition of
financial interest by the passage of time, or "residual margin release" (covered by paragraphs 30-c and
30-d). Our initial impression is that the benefits to users of financial statements under IFRS would not
justify the costs involved in the segregation of these components. To determine whether the
segregation of the financial component of the residual service margin would result in relevant
information that could significantly affect users’ decisions, it is necessary to analyze the impact of the
application of this concept. This analysis also requires the preparation of impact studies for different
products, determination of the term of service contracts and interrelation with discount rates that
would be applied to the setting and context of the Brazilian economy. We understand that
explanatory notes and accounting policies under IFRS could address how these different components
are calculated and incorporated in the actuarial valuation techniques so that users have access to such
information without the need for segregation of these components in the financial statements.
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 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
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
underlying items, for exemple, 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 to 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 cash the fulfilment flows 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 the underlying items ;
( ii ) changes in the fulfilment cash flows expected to vary indirectly with the returns on the
underlying items would be recognised in profit on loss, and
( iii ) changes in the fulfilment cash flows that 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 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?
Comment:
We believe that use of the approach described in item (c) of this question, which states that changes
in cash flows follow the form and accounting consequences of underlying assets variation for unitlinked contracts, is the most appropriate. We are also in favor of the proposed criterion for recognition
in profit or loss and other comprehensive income for changes in cash flows due to other risks (not
directly related to the variations of the underlying assets), covered by (c) (i) and (c) (ii) of this question.
The approach presented in (c) reduce the accounting mismatch in a manner similar to the goals
achieved by the accounting practice of "shadow accounting" as permitted by the current version of
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
IFRS 4.
Question 3 - Presentation of insurance contract revenue and expenses
Do you agree that the financial statements would provide relevant information that faithfully
represents the entity’s financial performance it, for all insurance contracts, an entity present, in
profit or loss, the insurance contract revenue and expenses, rather than information about the
changes in the components of insurance contracts?
Why or why not? If not, what would you recommend and why?
Comment:
We believe that the approach presented in this ED, for disclosure of different components resulting
from the measurement of insurance contracts, introduced various information that are not presented
according to the approach required by current IFRS 4. This fact can be considered an improvement
over the approach under ED 2010/8, which called for the presentation of a single result summarized
margin. However, we believe that segregation and disclosure of different components provide
information that increases the usefulness of financial statements to a limited extent. There are still
some factors, presented below, that, in our view, do not favor the introduction of significantly different
concepts in the presentation of the performance of insurers, over a short period of time:

We understand that the model to be used in Phase II substantially follows the principle that
the insurance contract can be viewed as a source of rights and obligations that generate
positive and negative cash flows in a given time horizon. This model, however, differs
substantially and in various ways to that model already used and consolidated into the market.
The current model used for performance measurement and disclosure, in accordance with
Brazilian accounting practices and regulatory requirements, follows, basically, the presentation
of revenues in underwriting, changes in technical provisions and recognition of claims and
benefits in accordance with accrual basis of accounting.
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br

Despite the disclosure of new elements in the income statement, these components may not
yet be aligned with the current system of financial risk and insurance risk management used by
institutions in Brazil. An example is the segregation of financial factors on the risk margin.

The time required for preparers and users of financial statements to be familiarized and to
acquire robust knowledge about the new financial and actuarial concepts brought by this ED is
still undetermined.

Top senior management and investor relations of Brazilian insurers, whose shares are listed on
stock exchanges in Brazil and abroad, have not had sufficient time to evaluate the impact of
implementing this ED as perceived by investors.

The current level of disclosure introduced by IFRS 7, IFRS 8, IFRS 4 in the Brazilian market has
significantly increased the number of additional information, when compared with the
disclosure practice prior to the adoption of IFRS by insurers. Experience shows that the market
is still being acquainted with these new disclosures. Therefore, the introduction of a new
reporting approach and its impact on preparers and users, and the consequences of this ED
have not been widely evaluated and discussed by a significant number of preparers in Brazil.
Question 4 - Interest expense in profit or loss
Do you agree that the financial statements would provide relevant information that faithfully
represents the entity’s financial performance if an entity is required to segregate the effects of
underwriting performance the effects of the changes in discount rates by :
( a) recognition in profit or loss , the interest expense determined using the discount rates that
applied at the date the contract was initially recognized . 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 affect the amount of these cash flows ,
and
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
( b ) recognizing, in other comprehensive income , the difference between :
( i ) The carrying value of insurance contracts measured using the discount rates applied at the
balance sheet date , and
( ii ) the carrying amount of 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 affect the amount of those cash flows ?
Why or why not ? If not , what would you recommend and why?
Comment:
We recognize the similarity of this procedure with other accounting practices already adopted in other
IFRS standards, such as segregation of interest cost from service cost, in actuarial calculations of
periodic cost of defined benefit plans, in accordance with IAS 19, regarding employee benefits. The
application of this concept by an insurer for its entire portfolio of contracts is substantially complex
and costly. This is due to the existence of portfolios with different characteristics and large quantity of
products in the context of implementation of the proposals contained in this ED, to segregate the
effects of changes in cash flows for the underwriting execution from financial effects in discounting
future cash flows to present value.
The introduction of the concept of segregation of the effects of changes in interest rates and their
effect on the cash flows between the start date of the contract and the balance sheet date requires
significant changes in systems to incorporate this calculation routine. The impact and total estimated
cost of this practice for different entities is still undetermined. The initial perception is that the cost to
generate such information by preparers of financial statements may come to outweigh the benefits for
the users of this information.
Additionally, we believe that the adoption, under the context of insurance and reinsurance contracts,
of an approach that brings concepts which have already been used by IAS 39 and IFRS 7, for
measurement and disclosure of the effects of gains and losses arising on the initial investment in a
financial instrument (widely known as “day one profit or loss”), still poses difficulties in implementing
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
from a practical point of view, due to the existence of a vast amount of products and portfolios. The
perception of customers and market impact following the release of immediate gain effects on
profitable underwriting portfolios have not been evaluated by the Brazilian market.
Question 5 - Effective date and transition
Do you agree that the proposed approach to transition adequately balances comparability with
verifiability?
Why or why not? If not, what would you suggest and why?
Comment:
Yes. We agree with the approach and the benefits introduced by the exemptions in paragraphs C-5,
for modified retrospective application in cases of impracticability, and C-6 of this ED, which prevents
insurers to undertake exhaustive efforts in processing and applying these ED requirements for
contracts in force at the beginning of the earliest period presented in the financial statements. These
principles have been corroborated by the inclusion of paragraph C-8 for explanation to users about
any exemptions taken by the entity.
Question 6 - The likely effects of the standard on 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 compared with any alternative approach that you propose and with the proposals in
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
the 2010 Exposure Draft?
Please describe the likely effect of the proposed as a whole:
(a) the transparency of financial statements of the relation to the effects of insurance contracts
and comparability between financial statements of different entities that issue insurance
contracts; and
(b) the compliance costs for preparers and costs for users of financial statements to understand
the information produced, both on initial application and on an ongoing basis.
Comment:
In general, we consider that the draft introduced information about components arising from the
measurement of insurance contracts that may be useful to users but to a limited extent in some
respects. Our main considerations in relation to this ED are:

Although several new requirements presented in the draft are interesting from the viewpoint
of improvement of management of financial risk and insurance risk, we consider the approach
extremely detailed. The benefits to users of financial statements, due to the information
segregation of financial components from those arising from underwriting may outweigh the
costs involved in carrying out such work. The initial perception is that the impact on actuarial
work would be too burdensome in the very first moment.

The attendance of IFRS 4 requirements is already extremely expensive for Brazilian insurers.
IFRS 4 incorporates complex elements for sensitivity analysis to insurance risk and financial
risk, but such elements are widely spread in the market. Therefore, the cost of reprocessing
and compiling data from a large number of portfolios in order to segregate the financial
effects of different blocks of contract evaluation, according to the methodology proposed by
the draft, can be very high.

It is possible to state, with a reasonable degree of certainty, that few entities in Brazil know
methodologies and techniques suitable for evaluating the residual margin, such as Economic
Capital or other complex techniques.
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br

Several techniques and approaches introduced by the draft have practical and objective
application for financial products. Its impacts have not been evaluated for different insurance
products.

The time and cost required to train actuarial, financial, accounting and investment teams, given
the current scenario in our jurisdiction, are still undetermined. Various techniques and
approaches introduced by the draft are not widespread among Brazilian professionals.
Additionally, smaller insurers with less resources, access to technology and highly dependent
on specialized services of third parties would need even more time to adapt.

Most of the companies listed on international stock exchanges still need more time to develop
robust systems, adequate internal control environment for financial reporting (SOX) and
impact studies to assess the risks and impacts of the adoption of the new standard in a short
period of time.

Spending on systems development, hiring of specialized consultants and increase in staffing
costs in actuarial and accounting positions for the adoption of this new standard have not yet
been precisely determined, but the perception is that the adoption of the fundamental
requirements of the draft would require significant investments. Importantly, many insurers are
in the process of developing and introducing new business systems to accommodate the
current expansion of the insurance market in the country, with projects classified as 'high
priority', as well as new reinsurance and coinsurance systems, plus costs for complying with
new capital rules, expected to be in effect in 2014.

Insurers and investors have not yet assessed the impact of the draft on the metrics used to
build financial ratios that are used to evaluate the performance of the entities.

Insurers have not yet assessed the impact of the current proposal for the accounting of
deferred acquisition costs (DAC) and the potential impacts on contract pricing and product
margins.
Question 7 – Clarity of drafting
Do you agree that the proposals were drafted clearly and reflect the decisions made by the
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br
IASB?
If not, please describe any proposal that is not clear. How would you clarify it?
Comment:
We offer no comments.
Yours faithfully,
Solange Beatriz Palheiro Mendes
Executive Director
[email protected]
Confederação Nacional das Empresas de Seguros Gerais, Previdência Privada e Vida, Saúde Suplementar e Capitalização
Rio de Janeiro - Rua Senador Dantas, 74, 6º andar | Centro | CEP 20031-205 | Tel 21 2510 7777 | Fax 21 2510 7832
www.cnseg.org.br