We believe the new accounting models are a step forward in better reflecting insurers’ underlying risks and liabilities – albeit with more volatility in the results. Having greater transparency is long overdue for both the industry and investors alike.
The things you need to know:
- The proposed measurement model is based on a current fulfillment value that incorporates all available information in a way that is consistent with observable market information.
- Respondents to the Boards’ outreach activities, including comment letter responses, have clearly demonstrated the demand for additional convergence between the Boards’ proposals.
- Volatility in results generally arises through economic or accounting mismatches. An insurers’ profit or loss and equity may become more volatile by using current estimates of cash flows and assumptions, including the discount rate, are revisited each reporting period.
- For insurers with participating business, the introduction of a ‘mirroring approach’ may result in significant changes from current practice.
Both the IASB and FASB are working to replace or update existing guidance on financial instruments. While both proposals provide an opportunity to re-designate some financial assets on initial application of the new standards careful consideration of accounting impacts as well as any effect on asset-liability management is important. This is particularly true if the effective dates for financial instruments and insurance contract proposals differ.