Insurance Industry Debates Proposed New Accounting Standards

by Robert Lee, Tax-News.com, London

14 June 2007

The proposed changes to the way insurance contracts are reported will significantly impact the way liabilities are valued, leading to greater subjectivity in company accounts according to business advisors Deloitte.

In Deloitte’s Insurance Market Update, which has been issued following the publication of the International Accounting Standards Board’s (IASB) discussion paper on accounting for insurance contracts, experts at Deloitte have highlighted some key issues and implications in implementing the proposed standard.

The paper focuses on insurance contract liabilities and how they can be measured on a market consistent basis. It extends the concepts of fair value and builds on existing standards that measure non-financial and financial liabilities based on current estimates of future cash flows. In the paper, the IASB proposes a valuation method referred to as ‘current exit value’ which would apply to all types of insurance and reinsurance contracts.

Commenting Alex Arterton, insurance partner at Deloitte said: “The development of the principles into a standard across the life and non-life insurance industry along with the emergence of detailed guidance is no easy task. It will no doubt generate much debate as insurers, users of accounts, and industry regulators comment on the proposals.

“The level of uncertainty in insurance gives management wide discretion to determine cash flow assumptions. In addition, the lack of observable data for risk and service margins will lead to significant subjectivity and discretion available to management in determining these margins. The challenge for management will be to document and justify the judgement supplied. Detailed disclosure of the assumptions and methodologies used to calculate risk and service margins will be crucial to the effect of market disclosure in promoting the development of established industry practice for the consistent estimation of these margins.”

The discussion paper ‘Preliminary Views on Insurance Contracts’ seeks comments on its proposals by 16 November 2007. An exposure draft will follow towards the end of 2008 and after further public consultation a new accounting standard is planned to be in place in 2010.

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