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Until the end of November, the International Accounting Standards Board will be seeking comment from insurers on its proposals to recommend changes in the way insurance contracts are written.
Gail Tucker, a partner in the London office of consultants PricewaterhouseCoopers LLP, said the IASB proposals represent “a big change, particularly for life insurers.”
The new rules will affect any organization that issues insurance contracts under International Financial Reporting Standard. In addition to insurance companies, the change will involve banks that offer financial guarantee products.
The proposals will bring in a single IFRS standard “that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis,” the IASB said.
“The publication of this exposure draft marks an important milestone in this review process,” IASB Chairman David Tweedie said in a statement. “The proposed standard better reflects the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to investors.”
The biggest effect will be felt in territories that currently use cost-based accounting in insurance contracts, Tucker said. For these territories, she said, “It may well be quite a fundamental change.”
Technically, the new structure will involve an updating of IFRS 4, the existing accounting standard for insurers. Life insurers, with their long-tail business, are more likely to feel the change than shorter-tail nonlife insurers, Tucker said, adding that one possible result of the new approach could be more income statement volatility than some insurers are accustomed to.
Catherine Drummond, a consultant at actuary Lane Clark & Peacock LLP in London, said the “IASB proposals are effectively changing the way the expected return on assets is to be calculated. And what they’re suggesting is that instead of using the expected return on assets they actually use the discount rate.”
Businesses that have large pension programs may feel a particular effect from this, Drummond said at a recent briefing by Lane Clark & Peacock on the U.K. pension sector.
The IASB is expected to produce a final standard in 2011, with a possible implementation date in 2013 or 2014, Tucker said. She predicted a “mixed reception” for the IASB proposals, with much of the criticism coming from nonlife insurers, who are happy with existing structures.
There are likely to be no surprises in the IASB proposals for people who have followed the discussion, Tucker said. The matter has been under consideration, starting with the IASB’s predecessor, since as far back as the 1990s.
The IASB, which was established in 2001, described IFRS 4 as “an interim standard that permitted many existing international accounting practices to be retained, whilst beginning a more comprehensive review of insurance accounting as a second phase of the project.” The latest proposals “are the result of that review,” the IASB statement said.
Tucker said she suspects that some insurers will question a planned change to the presentation of income statements, which, for some companies will mean that premium will no longer be shown as a revenue line. She was reluctant to estimate either savings or costs that might result from the change. Both are likely to “vary hugely” by company and territory, she said.
European companies that are preparing for Solvency II may have an advantage, Tucker said. “They may be able to use the underlying building blocks in their systems design to come up with the numbers. In other territories that don’t have Solvency II there is likely to be more of a change.”
Solvency II is a regulatory regime designed to bring a uniform capital adequacy structure for insurance and reinsurance in the 27-nation European Union. It is to be in place at the end of 2012.
Tucker believes some life insurers would prefer to apply an asset-backed accounting formula in order to minimize income statement volatility when discounting their reserves. “I suspect a number of insurers will want all their acquisition costs to be able to either be deferred or recognized revenue to avoid a day one profit,” she said.
The IASB is aware of the preparations that are being made for Solvency II and has been in contact with regulators in the European Union, Tucker said. But the IASB is also alert to the difference between its own work and the planners of Solvency II, she said.
Putting the IASB proposals into effect as late as 2014 might seem to be a long way off, Tucker said, but the IASB knows it needs “time to gather the data and build the systems to implement this change.”
Pat Regan, chief financial officer at Aviva, said Aviva has “sought to actively engage with the IASB” in its work on accounting standards.
“We welcome the ongoing commitment of the IASB to address the financial reporting for insurance contracts,” Regan said in an e-mail. “The industry is seeking a global, consistent and transparent basis for reporting. We look forward to responding to the exposure draft in due course.”
Zurich Financial Services also responded with an e-mailed statement. “We welcome the IASB having put forth a proposal, the statement said. “We will analyze it in detail and comment on [it] in due time.”
Listen to the full audio interview with Gail Tucker at http://www.ambest.com/media/media.asp?RC=176429
(By Robert O’Connor, London editor: Robert.OConnor@ambest.com)