Insurance Companies and IFRS 9

Something that I have been trying to get straight in my own mind is the impact of IFRS 9 on insurance companies and how it will interact with IFRS 4 phase ii. As with all of my musings on accounting treatments this is outside my comfort zone  - so please don't place any reliance on what follows.

IFRS 9 as it currently stands provides for two main methods of valuing financial assets.  Amortised cost which applies where

"(a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows.

(b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding."

And for everything that's not at amortised cost.

"A financial asset shall be measured at fair value unless it is measured at amortised cost with gains and losses going through profit and loss."

So in my simplistic world you are going to account for bonds at amortised cost and everything else at fair value.

Just to stop things from getting to easy there is also an irrevocable election to treat assets that would be accounted for on an amortised cost at fair value if it prevents an accounting mismatch.  Would bonds backing unit linked liabilities be an example of where a life insurer might apply the election?

However, there seems to be a problem with IFRS 9 as it stands.  Under IFRS 4 phase ii  liabilities are measured using market interest rates so there is a potential mismatch between the valuation of assets and liabilities. (Although couldn't you manage this by means of the election for market value as per above?).

However, the IASB issued ED 2012 (4).

ed link

This includes another method of valuation, fair value through other comprehensive income ("OCI").  This is to be applied where

"The asset is held in a business model in which assets are managed

both in order to collect contractual cash flows and for sale and,

The contractual terms of the financial asset give rise on specified

dates to cash flows that are solely payments of principal and

interest on the principal amount outstanding."

I think that at least part of the reason for introducing the fair value through OCI category is to deal with the insurance accounting mismatch described above.  When combined with IFRS 4 phase ii what will go through the profit and loss account for bonds / liabilities backed by bonds will be amortisation and an interest item representing the unwind of the historical valuation interest rate. In the OCI there will be an allowance for the difference between historic interest rates and market interest rates and the difference between market value and amortised cost of bonds.  If I'm correct you can see that this makes some sort of sense, probably gives fairly stable figures in the profit and loss account but at the expense of "operational complexity."

Finally the implementation date for IFRS 9 is 1 January 2015.  However, the implementation date for IFRS 4 phase ii is more like 2018.  However, the intention is that the fair value through OCI basis should dovetail with the IFRS 4 phase ii, so what happens in the interim?