Ernst & Young welcomes IASB discussion paper on Phase II of Insurance Accounting Project
23 May 2007 | People and Companies | News | Ernst & Young
Welcoming the International Accounting Standards Board's (IASB) discussion paper "Preliminary Views on Insurance Contracts", Ernst & Young today called for greater convergence between the different approaches to reporting to investors and regulators by insurance companies and an end to divergent accounting practices throughout the world. James Dean, IFRS practice leader for Ernst & Youngs Global Insurance Centre, said: "This discussion paper is good news for the insurance industry. Due to a lack of comparability and transparency in financial reporting, many believe investors impose a cost-of-capital penalty on insurers. We support the IASB's efforts to develop a standard that will do a better job in addressing the needs of users of insurance company financial statements. However, we encourage greater urgency in achieving real convergence in financial reporting to reduce that cost premium".
The new accounting standard which will eventually emerge from this discussion paper will herald a fundamental change in the finance function of insurance companies. This is because the measurement models that it proposes are likely to be very different from those currently in use in most insurance companies. The major challenge will come in implementation and in understanding the impact of a new standard on systems, data, pricing and capital management.
Tim Rutherford, Director at Ernst & Young commented that whilst South African companies are currently in the process of implementing IFRS, the challenges experienced by these organisations will also be faced by their global counterparts.
Insurers in Europe will face the additional challenge of concurrent implementation of the Solvency II directive on common European regulatory principles, which is likely to be implemented in 2010. James Dean added, "It is hoped that concurrent implementation will result in greater convergence between the different approaches currently used for capital and risk management and for reporting to investors and regulators. An accounting model that focuses on the needs of users, encourages better measurement and analysis of results, and more clearly reports on the drivers of value in the business will be greatly welcomed."
Current insurance-contract accounting is characterised by divergence between insurers in different countries. The many existing accounting models that remain available to insurance companies under the interim standard, IFRS 4, typically do not fully reflect performance because they are overly influenced by the prudential requirements of insurance regulators and often result in the reporting of liabilities and assets measured on inconsistent bases.
The discussion paper proposes that a new model should measure insurance liabilities at a "current exit value". This will require liabilities to be valued using explicit and unbiased predictions of future cash flows, probability weighted and discounted to take into account the time value of money and the risks inherent in the cash flows being valued. However, the requirements of the future standard are still being developed and significant unresolved issues remain.
James Dean concluded, "The current-value measurement approach presented by the IASB raises some complex issues about how to set risk margins and how to estimate unobservable market inputs. The insurance project is in many respects pushing the boundaries of current international accounting practice. In considering a fair-value-like measurement basis in an industry where there is no active secondary market, the IASB is having to address many of the longer-term issues it must face in its efforts to develop an improved generally applicable financial reporting framework".
