Respondents to IASB insurance contracts discussion paper offer ideas for improvement
A report issued by Ernst & Young today shows that overall the insurance industry and its constituents have given the International Accounting Standards Board (IASB) strong support for the development of a high-quality global insurance standard, with many referring to it as much needed. The report, prepared for the benefit of a consortium of the world’s most influential insurance trade bodies, summarises the comment letters posted to the IASB’s website in response to its Discussion Paper (DP), Preliminary Views on Insurance Contracts, and shows some differences of opinion on how the standard should be drafted and implemented, often depending on geography, regulatory environment or industry sector.
James Dean, practice leader for Ernst & Young’s Global Insurance Centre and one of the leaders of the review team, comments, “Whatever final insurance standard the IASB develops will result in a fundamental change in the finance and actuarial functions of many insurance companies. Understanding the impact on systems, data, pricing and capital management will be a major challenge. Insurers should start now to examine how this will affect their financial systems and statements. The impact will be truly life changing for many organisations.”
The broad areas of consensus showed that, collectively, the industry and others believe accounting for insurance should reflect the economics of the business. There is little support for current exit value (CEV), as defined in the DP, without potentially substantial modifications. Many respondents do not agree that the transfer concept is appropriate for valuing insurance liabilities. The “value in settlement” measurement attribute supported by many, emphasises ultimate settlement since contracts are not likely to be transferred, but paid or settled by the company in the future.
Tim Rutherford, lead director for insurance at Ernst & Young South Africa states that there is a shift taking place in the product arena with more people opting for unit trust products and the life industry taking a more innovative look at its traditional retirement savings products.
“Insurance companies have had to look hard at their product offering in the last three years, as they have had to deal with the negative impact of the various Pension Fund Adjudicator decisions on their traditional products. The flexibility offered by unit trusts to investors and the wide range of offerings have appealed to the younger markets that, often perceive insurers as old fashioned. In order to compete for a market share of the investment premium, insurers have started to offer more flexible investment and risk products that are simpler to understand, have a transparent fee structure similar to those offered by unit trusts,” he says
Despite this, Rutherford says that unit trusts have continued to grow premium income faster than the insurers. “It will be interesting to observe the market trends in the next few months as the impact of higher interest rates and a slowing economy start to bite on house hold income. We can certainly expect to see a large number of disinvestments and surrenders as investors feel the credit squeeze and either stop saving as they need the income to pay household expenses or surrender the policy or unit trust to pay of expensive debt. This is when the more flexible unit trusts products could potentially feel the reduced premiums and outflows harder than their insurance counter parts, time will tell.”
The DP proposes three building blocks for the measurement of insurance liabilities: cash flows, discount rates and margins. Respondents broadly agreed with an approach to measurement for life insurance similar to the building block approach, but disagreed on the specific definition and application of those components.
Robert Stein, of the Global Insurance Centre, Ernst & Young, comments, “Our primary objective was to provide a clear and unbiased view of the responses submitted to the IASB. Furthermore, dialogue that took place with several of the authors of those letters allowed us to gain a deeper understanding of the issues and alternative views expressed by them.”
There are concerns about the timing of developing such a standard in relation to other IASB projects and also its relationship to other industries that might be materially affected. The majority of respondents commenting on timing issues favour advancing other IASB projects first, while, in contrast, others support accelerating this discussion and not waiting for convergence with US GAAP. However, there was consensus that all IASB projects should be coordinated to avoid conflicts, and almost every organisation called for field testing.
