Insurance accounting: change on the horizon
Barry Stott, Partner in Assurance at PricewaterhouseCoopers (PwC), explains the draft paper on accounting that is expected to ensure consistency and comparability in the insurance industry and highlights the consequences for the various insurance sectors.
PwC welcomes the discussion paper of the International Accounting Standards Board (IASB) on insurance accounting as it will improve comparability in the industry as well as between countries. This discussion paper (Preliminary Views on Insurance Contracts) will lead to a single global standard which would make annual financial statements of insurance companies more relevant and reliable, something that financial analysts have been wanting for several years now.
Participation
Insurance industry participants and professionals should seize the opportunity to comment on the discussion paper as once it is in exposure draft format it becomes more difficult to change and accommodate comments.
Change in current systems
Insurance companies need to become familiar with the proposed accounting treatments contained in the discussion paper as it will take time to change their financial systems and construct a history of data that may be required when new accounting treatments take effect.
Short-term
A major change proposed that will affect short term insurers is the new requirement to discount contracts. This impacts especially those contracts that have a longer term horizon such as marine, construction or liability insurance. These insurers would have to measure future cash flows from these contracts at 'best estimate' and then account for the time value of money at an appropriate discount rate.
Long-term
For long-term insurers, the method of accounting for risk margins would change. In SA at present, compulsory margins are added to contract valuations and companies have the discretion to add further discretionary margins to allow for profit release as the insurer is released from risk. In future this risk margin would be calculated by determining what another industry player would price the insurance book at if they had to take it over.
The discussion paper is also favouring what is known as the 'current exit value' measurement method, also preferred by world-wide insurance industry regulators, as opposed to the 'current entry value' method frequently used in practice and preferred by industry forums in Europe.
PwC will be submitting a global firm comment to the IASB, due by November 2007. The paper is expected to generate much interest and even controversy, with some members of the IASB already taking different views on certain issues.
