Major changes ahead for insurance accounting 

    MEDIA RELEASE  

Arriving at common requirements is likely to have a significant impact on the New Zealand insurance industry, considering the current diversity under IFRS in accounting practices in different geographies.  

Insurers will need to get to grips with these proposals as they represent some far-reaching changes. They come at a time when there are already significant proposed changes on how financial organisations of all kinds measure their financial instruments.

Commenting on the development, Bill Wilkinson, KPMG’s Head of Insurance in New Zealand says, “The IASB is proposing to base measurement of rights and obligations under an insurance contract on an amount an insurer is obliged to pay through the life of the contract rather than a model based on an “exit value” as if transferring the contract to a market participant.

This reflects the difficulty in developing market-based assumptions in measurement when there is not an active market for insurance contracts.

“Furthermore, in the proposed insurance model, gains would not be recognised when an insurance contract is secured but rather as the services are provided.  In principle this approach is not dissimilar to the current services approach already adopted by insurers in New Zealand.”

The effects of changes in assumptions, whether financial such as interest rates or non-financial such as mortality and morbidity rates, would be required to be recognised in the statement of financial position and the statement of comprehensive income each reporting period.

Another area which is likely to draw significant comment is the presentation of the income statement. Although the IASB has proposed a presentation for the income statement which follows the new measurement model, this presentation focuses on net margins rather than reporting revenues and expenses of an insurance contract.  As a result, there may be a loss of information needed for financial statement users to analyse an insurer’s business.

Bill added that, “In New Zealand, the development of a comprehensive IFRS for insurance contracts should be considered in conjunction with the proposals set out in the Insurance (Prudential Supervision) Bill[1] addressing the capital adequacy requirements of our non-life and life insurers.

“The recognition and measurement of assets and liabilities under the solvency standards published by the Reserve Bank of New Zealand will be different from those used in financial reporting.”[2],[3]

However, these differences are limited to isolated issues and situations, where the solvency requirements of the Reserve Bank and the insurance proposals have different objectives. Clear objectives should allow reconciliation between the reporting frameworks to avoid confusion on what is the financial position of an insurer.

“Given the significance of the proposals to an insurer’s financial statements and the challenges that can be expected in implementing them around the world, particularly to insurers writing long-term products as well as insurers operating globally and in emerging markets, we support the Board’s further consideration of an appropriate effective date.

“There is undoubtedly a significant amount of technical information to digest, but as insurers work through the detail they should begin to identify the systems, data and process areas impacted by this proposed accounting change together with the likely broader business and people impacts to derive a plan to address these matters in a way that meets likely adoption timelines.” 

Today’s proposals have been issued by the IASB.  A separate discussion paper from FASB is planned for later this year.

“Although it is disappointing that the IASB and FASB have not been able to issue a joint exposure draft, we recognise the challenges involved in replacing the US GAAP insurance framework and commend the IASB and FASB on their efforts to achieving convergence in discussions on the new model to date. We look forward to the discussion paper that will be published by the FASB later this year,” says Bill.

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For further information please contact:

Sneha Paul, KPMG Communications, 09 363 3590 or 021 243 8997.