Towards consistency in insurance company reporting
Have you ever pored over the annual financial statements of an insurance company? Whether short-term or life, the results are difficult to read, and even more difficult to compare. Market analysts believe insurers will unlock more value for shareholders if their results are more readable. This is one of the sentiments expressed through PriceWaterhouseCooper’s (PwC) latest insurance survey. Their March 2010 report, Making Sense of the Numbers, provides South African analysts’ perspectives on current and future reporting standards in the insurance industry.
The survey condenses the views of seven South African insurance analysts. Some of their comments could raise a few eyebrows. For example: “Investors would prefer information that is 90% accurate, if they understand 100% of it, rather than information that is 100% accurate and 10% understandable.” Most accountants take a ‘100% accuracy and to hell with readability’ stance, but the comment gets a point across. Analysts want a consistent standard to enable them to assess all participants in the industry on a like for like basis.
A new standard
The struggle for uniform reporting among insurers is ongoing. More than a decade ago, the International Accounting Standards Board (IASB) began working on a standard for the accounting treatment of insurance contracts. Their efforts came to fruiting in IFRS4: Insurance Contracts that came into effect on 1 January 2005. But these guidelines only dealt with insurance contract disclosure. Insurance companies still use Generally Accepted Accounting Principals (GAAP) to measure and report on insurance contract performance. There is still plenty of wriggle room when it comes to recognising insurance contract profits, renewal premiums, acquisition costs etc.
According to Victor Muguto, Insurance Leader Southern African at PwC, the IASB will release an exposure draft for IFRS4: Phase II in two months time. This draft will form the basis of a new accounting standard for the measurement of insurance contracts. What do analysts expect once the standard is finalised? The survey revealed four ‘wishes’ for future financial reporting on insurance contracts. Analysts would like:
- A reporting framework that better reflects the fundamental economic realities, more consistency and improved disclosure on reserving assumptions;
- A separate reporting standard for insurance companies;
- Simplicity and pragmatism rather than theoretical precision;
- The introduction of explicit risk margins in reserving.
Insurance company reports include reams of information on investing activities. Analysts indicated that the standards on financial instrument reporting should include:
- The fair value through profit and loss accounting for financial instruments;
- A consistent approach for the classification of financial instruments.
Keep it simple
There were repeated calls for simplicity in future reporting standards. “Insurance financials are complex and littered with actuarial jargon,” wrote one respondent. With another observing: “All the complexity doesn’t add value!” One of the major challenges will be to implement this simplicity without unforeseen consequences. Changes to how insurance Companies recognise profits, for example, could encourage product development that’s not profitable in the long-term.
Consistency is a buzzword for the future of insurance company reporting. “The trouble with most insurance reporting is the lack of direct comparability of the information presented,” said one participant. He mentioned the recognition of rand reserves and bases for arriving at such assumptions as an area of concern. Attempts to address consistency concerns through embedded value (EV) accounting seem to have added to the confusion. Analysts cannot understand why IFRS earnings (in the income statement) don’t reconcile to EV earnings. To make matters worse, there are inconsistencies among insurers with respect to assumptions made in EV reporting.
Market consistent embedded value (MCEV), a recent industry development only employed by a single local insurer, is criticised for lack of consistency and introducing further complexity.
The way forward
IFRS4: Phase II will set standards for measuring performance on insurance contracts. A standard for the measurement and classification of financial instruments has already been issued by the IASB, and will be mandatory from 2012. But analysts are divided on whether local insurers should adopt the financial instrument standards before they apply new insurance contracts standards. “We realise that there is still a long journey ahead, and hope that the observations made in this survey give insures some food for thought when preparing financial reports in the future,” said Muguto. He encouraged local insurance industry stakeholders to provide feedback on the IFRS4: Phase II exposure draft, and play an active role in developing future insurance reporting standards.
Editor’s thoughts: If you thought it was difficult to sell insurance products, spare a thought for the accountants and actuaries who have to measure and report on these sales – and the analysts who have to make investment decisions based on such reports. Are you concerned with insurance company reporting standards, or are you content as long as their product offerings are first class? Add your comments below, or send them to [email protected]
