23 November 2012

CRE: Insurance accounting rules finally underway, prepare for a bumpy ride

Swiss Re, the Zurich-based international reinsurance group, believes that 'significant' progress has been made on new insurance accounting standards, but warns that key details still need to be settled.

In a new Sigma survey published by the reinsurance group, Swiss Re pointed out that the timetable for implementation is likely to be further delayed. The reinsurer believes that near-term prospects are 'not bright' for a converged global insurance accounting standard.

The publication, 'Insurance accounting reform: a glass half empty or half full?', concludes that the proposed accounting reforms can contribute to more meaningful financial reporting in insurance. But the reinsurer states that it probably needs to be complemented with additional metrics that 'clearly and concisely' communicates insurers' underlying economic value to their stakeholders.

Most risk and insurance managers would welcome such clarity as they grapple to work out the finances of their core service providers.

Swiss Re correctly points out that the insurance accounting reform project has progressed very slowly. "For over a decade, accounting standard-setters have been wrestling with how best to improve insurance accounting practices. In particular, the International Accounting Standards Board (IASB), in collaboration with the US-based Financial Accounting Standards Board (FASB), has been developing a new valuation framework for insurance contracts and has sought to upgrade existing accounting standards for other financial instruments", pointed out Swiss Re.

Swiss Re also pointed out that insurance presents 'significant challenges' for accounting professionals. "In order to prepare their financial statements, companies need methods to value their assets and liabilities and to recognise associated revenue and expenses. At face value, this would seem straightforward. But in fact it raises significant questions concerning valuation and measurement. Although these issues are not unique to insurance, they are arguably more acute than in many other industries."

According to the reinsurance group one of the key challenges is that future cash flows that stem from insurance contracts are difficult to estimate in advance and so it is hard to place on them a value.

Long-tail liabilities on some insurance covers will, for example, be more sensitive to changes in interest rates than the supporting assets, which may not show up in insurers' accounts if the actuarial assumptions are locked-in at inception. Also, there are 'significant' differences in accounting practice across countries that make international comparisons of insurers' financial statements difficult, said the reinsurer.

Darren Pain, co-author of the Sigma study said: "The new accounting standards should encourage insurers to be more open about the source of uncertainty surrounding their estimated assets and liabilities as well as the rewards for bearing risk, but to foster improved transparency, additional reporting metrics will probably be needed".

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