“The new accounting model for insurance contracts proposed today by the IASB would introduce more volatility to the profit and loss account but more accurately reflect the risks and liabilities undertaken by insurers, bringing insurance accounting into the 21st century – but not without a cost. 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.” according to Gary Reader, KPMG’s global insurance advisory leader.
The issuance of the proposals marks a major step towards implementing a common insurance reporting framework across much of the world. The debate has run for more than 15 years and the conclusion of the insurance project is now in sight.
Frank Ellenbuerger, KPMG’s global head of insurance, commented: “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 – bringing a final IFRS for insurance a great deal closer. 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.”
Joachim Kölschbach, KPMG’s global IFRS insurance leader, commented: “The IASB’s proposals would affect the way in which insurers report their profitability and financial position and would likely result in an overall increase in volatility in profit or loss and equity for most insurers as a result of having to continually remeasure insurance contract liabilities at a current value, rather than on an historical cost basis. Some of the remeasurement 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. The need to consider the implications for asset-liability management would be accelerated, as the requirements of IFRS 9 are currently expected to come into effect before the insurance proposals.”
In addition, those insurers writing long-term life business with options and guarantees may need to report changes in these items’ value in the income statement. As a result, there may be debate as to 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.
Kölschbach continued: “This would be the biggest ever financial reporting change for most insurers – far surpassing the adoption of IFRS. The extent of change would be far-reaching, and there is no question that insurers’ financial statements would look very different compared to today.
“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 would mean a big improvement in transparency and consistency, with benefits for both investors and the industry. This would be a new world for insurance – a world in which financial reporting metrics and stakeholders’ perceptions of insurers would change.”
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 impacted 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. For example, insurers in Europe may be able to find efficiencies with the implementation of their Solvency II models.
Reader summarised: “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.
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