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More transparency please – life assurance companies have plenty to do

30 January 2009 Gareth Stokes

In a presentation held in Johannesburg on 27 January 2009, PriceWaterhouseCoopers (PWC) shared results from their “Survey of Insurers’ 2007 IFRS Annual Reports.” The survey is based on work by a team of PWC analysts who reviewed the 2007 financial stateme

Changes to reporting requirements are driven by analysts, investors and regulators as they strive for consistency and transparency across the insurance sector. Thus the ink was hardly dry on the requirements stipulated in the first set of International Financial Reporting Standards (IFRS) before the industry had to accommodate three significant changes.

No rest for the insurance company accountants

Although only recently introduced, a number of the survey respondents were able to incorporate the changes to IFRS in their 2007 year-end accounts. The first change is referred to as IFRS 7 and relates specifically to financial instrument disclosures. Industry participants have agreed a new standard to replace IAS 30 and IAS 32. To put this in terms the layman can understand: investors, analysts and regulators want a better idea of the type of investments that the insurance companies are making. This is of particular importance in light of the huge failures witnessed in the financial services sector due to sub-prime backed securities.

The second major change came in the forms of revisions to IFRS 4 which deals mainly with insurance contracts. This change stipulates how insurance companies should analyse the risk pertaining to insurance-related assets and liabilities. In other words, a need was identified for a more in-depth analysis of the balance sheets of these companies. Revisions were also made to IAS 1. Insurance companies will have to provide much more detail on their capital management in future years. The financial statements must include details of objectives, policies and procedures for managing capital and mandatory disclosure of external capital requirements.

South Africa’s risk disclosures disappoint

The risk section of the survey assesses the question: “Are insurers presenting their risks in an accessible, intelligible and credible way. There is a wide disparity between the detail individual insurers include in this regard – with some annual reports dedicating 40 or more pages to the issue. It seems kudos went to the companies with bulky submissions, while those companies who tackled the issue in 10 pages or less were frowned upon. We asked Ilse French, PWC SA Insurance Technical and Knowledge Management Director whether this ‘quantitative’ measure was appropriate. Her response was fairly simple – there is no way an insurance company can accurately address the required disclosures so concisely. The South African insurance giants have some work to do in this area.

And French says South African companies are extremely weak in their capital management reporting too. 90% of insurers in this country dedicate a page or less to these disclosures. What this means is analysts aren’t getting a clear picture of what these companies view as ‘capital’, how much external capital they require, and how these capital requirements will be met.

Leaders and laggards

In their executive summary, PriceWaterhouseCoopers commends certain companies for their commitment to transparency. It says these ‘leaders’ provided the best examples of disclosure in terms of the various standards. Such companies:

· Link their overall risk management framework with capital management objectives, processes and procedures;

· Give prominence in the front half of the annual report to risk and capital management disclosures; and

· Provide clearly labelled and well-structured mandatory disclosures in the notes to the financial statements.

The followers still have plenty to do. “Companies that have stuck to basic compliance within their annual reports may have missed an opportunity to enhance market confidence,” concludes the report.

Although the move to greater transparency is commendable, it seems insurers are taking strain under the volume of accounting standard. The IFRS targets are continually shifting – while some companies are adjusting their reports to include stipulations contained in UK-based Solvency II as well. French says “the heavy burden appears to have left many insurers with little appetite to offer the broader discretionary information that would convey how they actually manage risks.” There’s no surprise there… If you’re under pressure to get the job done you’re going to clear the mandatory hurdles first. And if there are too many of those you simply won’t get to the optional disclosures.

Editor’s thoughts:
After attending the PWC “Survey of Insurers’ 2007 IFRS Annual Reports” we’re quite happy to leave the onerous task of insurance industry financial reporting to the experts. Have you ever taken the time to work through one of the life assurance companies’ annual financial statements? Add your comments below, or send them to

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