The insurance accounting standard is re-exposed for further deliberation

The International Accounting Standards Board (IASB) today released the much anticipated exposure draft for Insurance Contracts, in an effort to finalise the insurance accounting standard – particularly one where there has been little international consistency. The IASB has been working on this project for a number of years with the aim to standardise the insurance accounting standard globally.

 

Yusuf Dukander, Financial Services project director at the South African Institute of Chartered Accountants explainsthat Phase II of the insurance project will ideally replace the current International Financial Reporting Standard (IFRS) 4, known as the Insurance Contracts standard.  It is anticipated that the new standard will eliminate the current inconsistencies of insurers globally, thereby contributing to a single IFRS for all insurers to apply. 

 

Phase I, he says dates back to as early as 2001 when the IASB began its work on the insurance project.  Dukander says that a new standard has been long overdue and that this has resulted in accounting mismatches as well as financial information that is in certain respects impossible to adopt - even to the most expert of users. “Currently, some insurers are even diverging from standard practices when dealing with more complex insurance contracts.  This often results in investors and stakeholders being challenged in accurately valuing and making comparisons between insurance companies.”

 

The focus of the exposure draft in this round is regarding the following areas:

• the proposed measurement model for insurance contracts;
• treatment of participating contracts;
• treatment of the unearned profit in an insurance contract;
• the presentation of the effect of changes in the discount rate, in other comprehensive income; and
• the transition phase for insurers.

The IASB chairman, Hans Hoogervorst, was quoted as being “undeterred” regarding the re-exposure of the insurance project.  “He argues that it is no solution to pretend that risks do not exist and who knows whether uncomfortable market values are temporary or not? The industry, by contrast, has mooted various, more palatable approaches – such as using the “expected” return on insurer assets. Where should investors stand? They are faced with such a fudgy feast of numbers that clarity may be more appealing than stability.”

The main issue is the extent to which current interest rates should be used to calculate an insurer’s liability. The world as it is today has faced a low interest rate environment due to the post global financial crisis effects.  Another issue highlighted by the International Monetary Fund (IMF) is that “fair value accounting, if properly implemented, will likely make more explicit the redistribution of risks over time that is being done by insurers almost as a by-product of their core business of risk pooling, and could improve the pricing of those risks.”

The IASB has issued the exposure draft for comments until 25 October 2013 and plans to conduct some field work during the comment period. The results of the field work together with the comment letter submissions will inform the IASB’s deliberations in finally completing the insurance contracts standard. 

Dukander alerts investors and shareholders to the fact that international developments resulting in changing timelines for Solvency II has also pushed out the timeline for the complete implementation of Solvency Assessment and Management to 2016.

Dukander advises that it is also an ideal time for insurers to turn changes and challenges they face into real opportunities for growth, innovation and globalisation.