25 June 2013
New accounting proposals biggest ever financial reporting change for most insurers
KPMG welcomes the revised proposals on insurance accounting published by the International Accounting Standards Board (IASB).
Mr Lau Kam Yuen, Head of the Insurance Practice at KPMG in Singapore said: “This looks set to be the biggest ever financial reporting change for most insurers. The extent of change would be far-reaching, and there is no question that insurers’ financial statements would look very different compared to today.
Added Mr Gary Reader, KPMG’s global insurance advisory leader: “The new accounting model for insurance contracts proposed by the IASB would introduce more volatility to the profit and loss account but more accurately reflect the risks and liabilities undertaken by insurers.
“The level of change and the complexities associated with implementing these proposals should not be underestimated. Insurers would be likely to feel the consequences throughout their organisations. The devil is in the detail and the scale of change would depend on the accounting bases that insurers use today.”
The issuance of the proposals marks a major step towards implementing a common insurance reporting framework across much of the world. The debate over this insurance project has run for more than 15 years and its conclusion is now in sight.
Mr Frank Ellenbuerger, KPMG’s global head of insurance, commented that the IASB has made great efforts to improve the proposals by addressing the key concerns of constituents while retaining the objective of a current value basis for measuring insurance contract liabilities.
“We are now a great deal closer to establishing a final International Financial Reporting Standards (IFRS) for insurance. The length of the debate on the insurance project indicates there is not a single model that will please everyone. The proposals are likely to be complex and this is the last chance for insurers and users to influence the outcome of the project. Given the current diversity in practice, KPMG considers it essential that the IASB finalises a global insurance standard,” he said.
Mr Lau explained that the IASB’s proposals would affect how insurers report their profitability and financial position.
He said: “As a result of having to continually re-measure insurance contract liabilities at a current value instead of on an historical cost basis, most insurers are likely to experience an overall increase in volatility in profit or loss and equity.”
Some of the re-measurement will be through other comprehensive income (OCI) and the extent to which this mitigates volatility in profit or loss and equity would be highly influenced by whether financial assets which are linked to the insurance contract liability under proposed revisions to IFRS 9 Financial Instruments are measured at fair value through OCI, fair value through profit or loss or amortised cost, he added.
“There is an increasingly urgent need to consider the implications for asset-liability management as the requirements of IFRS 9 are currently expected to come into effect before the insurance proposals. Whether this is the case in Singapore remains to be seen.” noted Mr Lau.
In addition, insurers writing long-term life business with options and guarantees may need to report changes in these items’ value in the income statement. This may result in debate over whether other changes in the insurance liability should also be presented in OCI and about the residual volatility expected in both earnings and equity.
The re-exposure also introduces a new presentation approach for both the statement of profit or loss and OCI and statement of financial position, which would dramatically change the way insurers – especially life insurers – report performance. Insurance contract revenue would be allocated over the coverage period in proportion to the value of the services provided in each period, which would be completely different to the premium figures presented today.
Mr Lau continued: “The current lack of consistency in the way different insurers report their financial results makes it difficult for analysts and investors to analyse and compare insurers’ performance. A new global standard for insurance accounting can translate to greater transparency and consistency. This new world for insurance – a world in which financial reporting metrics and stakeholders’ perceptions of insurers would change – benefits both investors and the industry.”
The proposals would be likely to result in greater emphasis on the entire statement of profit or loss and OCI rather than just profit or loss. These changes to the accounting and financial reporting requirements would need to be explained to analysts, investors and other stakeholders.
Insurers may have to contemplate major changes to data and systems, education and communication to stakeholders and changes to asset-liability management. Profit profiles and product offerings may be affected and insurers would need to ramp up resourcing in the finance and actuarial functions. However, some insurers would be able to re-use and repurpose current efforts to implement accounting change for financial assets and for regulatory purposes.
Mr Lau concluded: “If insurers start planning now, the wave of change could open up opportunities for synergies in areas such as data collection, modelling capability and investment in systems and resources. The bottom line is that the technical aspects of the proposals would need to be made operational.”
The comment period for the proposals expires on 25 October 2013.