The insurance sector currently lacks a common approach to accounting and financial reporting. Diverse practices prevent a coherent framework for dealing with complex contracts or resolving emerging issues caused by new types of insurance contract. Sometimes, insurers don't even use a consistent approach between the businesses in their group.
All this means financial statements can be irrelevant and unrepresentative – and that investors and other stakeholders are unable to accurately value and compare insurers – an issue of increasing significance as the industry becomes more and more globalized.
In the second half of 2010, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) both released published draft proposals designed to solve the issue.
Download the report, available to the right, to see how the proposals compare.
How were the proposals received?
Many industry stakeholders expressed concern that the proposals are:
- too dependent on estimates,
- give rise to volatile results,
- overly complex for short-duration contracts,
- fail to recognize important distinctions between non-life and life insurance contract, and
- needlessly discard appropriate current approaches to non-life contracts.
Where are we now?
Both boards have been working methodically through the feedback (KPMG's IFRS Insurance Newsletter offers regular updates) – and have tentatively accepted many of the workarounds proposed by the industry.
Volatility, however, remains a major issue. Many insurers worry that the current measurement of insurance liabilities (specifically for interest rates) would, in effect, constrain them from measuring some financial assets at amortized cost (as permitted by IFRS 9) – thereby placing them at a disadvantage compared to banks, which compete with insurers to attract capital.
Download the report, available to the right, to understand the causes of volatility.
The IASB has acknowledged the need to solve the volatility issue.
One solution proposed by some insurers would be to lock-in the interest rates used for discounting, corresponding to the amortized cost model used by banks.
However, the IASB rejected this.
The industry then proposed another compromise – using 'current/current' measurement in the balance sheet, thereby valuing investments at fair value and discounting at a current rate for liabilities, but with potentially short-term and transient changes in value recognized directly in equity – so called 'other comprehensive income' (OCI), rather than in the profit or loss account.
It seems likely the industry would accept this compromise on the basis that many insurers support a segregation of long-term movements (a good indicator of performance) from short term, market-driven volatility.
When might we expect a final standard?
The IASB expects to publish a revised proposal in the second quarter of 2012. At this time, KPMG International estimates an effective go-live date of 2016.
Download the report, available to the right, to learn about the likely drivers behind this delay.
What are large insurers doing now?
Given the current uncertainty, many large insurers are limiting their activities to:
- keeping track of the developments and assessing their likely high-level impact
- educating core stakeholders
- lobbying the standard setters
- assessing what resources and support they'll need in critical areas such as accounting, actuarial, IT, HR, product development and investor relations
- considering the implications for other project activity such as enhancements to management information and investment in more sophisticated asset-liability management.