SA insurers must speak up now or forever bear the consequences, warns Deloitte

The South African insurance sector has just four months to respond to proposed changes to the accounting for insurance contracts. The International Accounting Standard Board (IASB) has issued proposals for comment that will fundamentally change the basis

Sounding a warning that the IASB’s Exposure Draft of the new standard (published on 20 June) could have a far-reaching impact on local insurers, Peter Tripe, a Director at Deloitte, said that the mooted changes, which had been under consideration for several years, could be issued in final standard form in 2014.

The effective date for compliance within the industry could be as early as 2017, enforcing a consistent approach to accounting for insurance contracts for insurance companies across the world.

South African insurers now have four months to provide the IASB with feedback on issues that would impact on measures that, after its introduction in 2014, would require compliance by all insurers internationally by the 2017 deadline - that still has to be decided.

“Insurance contract liabilities make up about 90% of the liability side of the balance sheets of most South African insurers. The new IFRS standard will substantially change the way these liabilities are accounted for and will impact on the earnings profiles of companies,” said Tripe.

“Currently South African insurers, when reporting, make various assumptions in calculating their liability in respect of the contracts they have written. Changes in these assumptions currently drive significant volatility in the earnings of insurers. The IASB proposes, amongst others, that these changes are spread over many years to reduce this volatility. Whilst many insurers and shareholders will welcome more predictable earnings, the deferral of profit at inception of the contract that it implies will be far less welcome.

Tripe warned that the entire look and feel of the income statement will also be changed. Insurers should be engaging now with analysts and shareholders to educate users of their financial statements so that there are no ‘surprises’ when they start reporting on the new standard.

“The global insurance industry now has a four-month commentary window to enable the proposal to be examined and have alternatives put forward for consideration. It is vital that people within the industry respond and put their views forward. Speak now or forever hold your peace… or in this case, pick up the pieces of a standard that may not make sense,” said Tripe.

He added that while insurers may have reservations about the details of the standard, the goal of having a single, consistent financial reporting standard that would bring global uniformity to the industry is fully supported by all.

Foreign investors would therefore have more confidence in these disclosures. This could improve the global competitiveness of South African insurers and attract foreign investment.
“The proposed changes will impact the insurance industry more than any previous changes in financial reporting required for insurers,” said Tripe.

He stressed that it is therefore important for South African insurers, particularly the industry’s major players, who could find compliance costing them more than R 100 million to implement the requirements, and take the time now to assess the potential implications for their businesses.

“Many insurers are in the process of implementing significant system changes for the new regulatory framework the FSB has targeted for introduction in 2016. You don’t want to be digging up the road twice, so think now about the implications of the new standard on data, systems and market communications that may have to be adapted,” concluded Tripe.