Analysts Want Clearer Insurance Reporting Standards, Report Finds

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January 12, 2010 Tuesday

451 words

Analysts want clearer insurance reporting standards, report finds

Kelly Durkin

A report from PricewaterhouseCoopers found insurance analysts calling for substantial changes to financial reporting standards.

A newly announced report from PricewaterhouseCoopers found that a lack of quality, consistency and transparency in financial reporting can hurt insurance companies by creating uncertainty about their financial condition and business drivers, with many analysts calling for substantial changes to insurance reporting standards.

The report, the final product of interviews with 43 financial analysts who cover the insurance sector, found dissatisfaction with the current insurance financial reporting framework and with inadequate disclosure of relevant information on financial statements.

The report also found that all analysts interviewed from the United States and more than 75% interviewed from the rest of the world consider insurance unique enough to warrant its own reporting model. For those who support a new model, slightly more than half prefer a different model for life and nonlife insurance and more than two-thirds would like to see separate accounting for businesses with different risk and earnings profiles, like savings and investment management services.

Many analysts interviewed for the report in the U.S. said that on day one of a contract, insurers should recognize neither a profit nor a loss, and most said acquisition costs should be deferred. Nearly two-thirds of all analysts interviewed said they would prefer to adopt new rules for classification and measurement of financial instruments with changes in contract reporting. Those who prefer adoption of the new financial instruments standard said such a change would make it easier to compare the insurance industry with other industries.

The report also found that IFRS users who analyze the life insurance sector had the greatest dissatisfaction with the current reporting framework.

Most analysts interviewed for the report said they supported the use of amortized cost and fair value through profit and loss for debt instruments, but there was less agreement on the continued use of the available-for-sale designation. Although mark-to-market accounting could increase earnings volatility, many analysts interviewed for the study said they would like to see both the book value and fair market value clearly disclosed in either the primary statement or notes.

“The true financial condition of insurance carriers seems to be uncertain to analysts, shareholders and the entire investment community,” Donald Doran, partner in PricewaterhouseCoopers insurance practice, said in a Jan. 11 press release. “We believe insurers need a new and improved approach to financial reporting applied consistently around the world that meets the challenges facing such a diverse and complex industry, as well as the needs of their stakeholders.”

January 18, 2010