The International Accounting Standards Board (IASB) has released a new exposure draft (ED) on insurance contracts. "Its proposals represent a fundamental change to the way insurance accounting will be conducted in the future” says Victor Muguto, PricewaterhouseCoopers Southern Africa Insurance Leader. “The impact will be felt across the sector and will require insurers to conduct a complete overhaul of their systems, data modelling and performance reporting. This could mean massive and costly changes in system infrastructure.”
The main objective of the IASB is to provide a basis for the consistent recognition, measurement and presentation of insurance contracts. Muguto notes that insurers have been criticised by the investor community about the transparency and comparability of financial reporting. “The ED is a significant step forward to achieving a global comprehensive and comparable accounting model.”
Muguto says that industry reaction will be divided on the ED recommendations. “Its proposals could create increased volatility in insurers’ reported results going forward, due to changes in discount rates, unbundling of certain contracts and a risk margin. Furthermore no gain, in excess of incremental acquisition costs, will be recognised at the inception of a contract. The reported profits by insurers could be dramatically impacted. There will also be significant changes to the presentation of the statement of comprehensive income.”
Muguto points out that the draft proposals cast their net wider than the insurance industry. “They affect all companies that issue contracts with insurance risk, such as financial guarantee contracts.”
He notes that companies globally are seeing a period of unprecedented accounting, regulatory and corporate governance developments, not to mention the pending new Companies Act and the King III Corporate Governance Code in South Africa. “Solvency II is the largest ever change to European solvency regulations for insurers – and it may be implemented to a large extend in South Africa through the Solvency Assessment and Management (SAM) regime proposed by the Financial Services Board. Over the next few years insurers will have to absorb, digest, comment on and implement all these requirements.”
Muguto concludes that given the profound impact of the changes proposed by the IASB, insurers should assess the implications of the ED on their existing contracts and business practices. "Management of insurers is also encouraged to comment on the ED to ensure their views on the significant changes are considered. The comment letter period ends on 30 November 2010 and a final standard is currently expected in mid-2011.”
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