While the IASB consultation on the Insurance Contract exposure draft may be over, the sector still faces several unanswered questions. Specifically:
- What are the effects of the forthcoming standard on profit recognition and how are product design, investment strategy and reinsurance program impacted?
- What accounting options and judgments are available, and how will they be applied compared to other market participants?
- Do new financial performance indicators need to be defined, in particular to measure performance internally and to report long-term value added externally?
- How can differences between accounting bases (IFRS, local GAAP, Solvency II) be explained and reconciled? How can comparability during the transition period be achieved?
- How will the accounting for financial instruments change?
- To what extent do IT-systems, data and processes need to be adjusted to comply with the IFRS requirements? To what extent can these adjustments be anticipated in Solvency II projects? How can Solvency II synergies be leveraged?
- What are the impacts of IFRS and US-GAAP divergence?
The IASB has addressed many insurers’ concerns. Allowing the presentation of volatility resulting from short-term interest rate fluctuations in OCI may be more consistent with the insurers’ long-term business model and makes concessions to analysts who want to project long-term distributable profits.
From our perspective, the critical areas within the current proposals and related impacts include:
- The volatility that may be created by certain proposals. For example, volatility in profit or loss and equity may be created due to the use of current assumptions in measuring insurance liabilities or when changes in the values of minimum guarantees due to short-term market rate fluctuations are presented in profit or loss.
- The interaction between accounting requirements for financial instruments and insurance contracts. The interaction needs to be considered comprehensively to enable users to compare financial results over time. The IASB’s recent decision that the mandatory effective date of IFRS 9 will be 1 January 2018, incentivises the IASB to progress expeditiously on the insurance contracts project with a view to having aligned effective dates.
- Concerns about the presentation of the statement of profit or loss and OCI, including the new proposed measure of volume and new definition of the term ‘revenue‘ for insurance contracts. These proposals could result in a major change in practice. The IASB needs to consider whether the presentation proposals, including the different presentations of the effects of changes in profit or loss, OCI or CSM, will provide the information that users consider most relevant. In any case, complexity for insurers – and users – will increase and represent an operational challenge.
- Contracts with participating features. The current proposals are complex, and difficult both to understand and to apply consistently. The final standard should include a clearly defined, overall principle in accounting for contracts with participating features.
The FASB recently decided to change the future direction and scope of its insurance contracts project. The FASB will consider targeted improvements to current US-GAAP and limit the scope to insurance entities.