The International Accounting Standards Board has agreed on the objectives for risk adjustment when it is reported in an insurer’s insurance contract.

At a joint meeting in London last week with the Financial Standards Accounting Board, the two organisations agreed risk adjustment should be the “compensation the insurer requires for bearing the uncertainty inherent in the cashflows that arise as the insurer fulfils the insurance contract”.

The boards also agreed risk adjustment should reflect the compensation the insurer is required to make when dealing with a claim, depending on a variety of outcomes.

“In estimating the risk adjustment, the insurer should consider both favourable and unfavourable outcomes in a way that reflects its degree of risk aversion,” the boards said in a statement.

They noted that a risk-averse insurer “would place more weight on unfavourable outcomes than on favourable ones”.

The meeting also accepted the bulk of the exposure draft on insurance contract recommendations but agreed to some amendments.

The major change has been the requirement for insurers to make separate disclosure of each change to their inputs and methods in a contract, together with an explanation of the reason for the change.

Insurers will also be required to analyse cash outflows resulting from recognised insurance liabilities based on expected maturities.

“Within the context of time bands, the boards decided to require the insurer to disclose, at a minimum, the expected maturities on an annual basis for the first five years and in aggregate for maturities beyond five years,” the boards said.

Other items agreed at the London meeting included not putting a limit on the range of techniques to estimate risk adjustment.