U.S. insurers need to pay attention overseas as efforts to standardize accounting methods heat up, an industry expert is warning.
As the International Accounting Standards Board (IASB) releases its Discussion Paper on Phase II of the Insurance Accounting Project, European insurers face the challenge of implementing new regulations on systems, data, pricing and capital management, said Rick Lynch of Ernst & Young's Global Insurance Centre.
European-owned or not, Mr. Lynch said, with a good part of the industry applying these principles, there will be a domino effect as International Financial Reporting Standards efforts in Europe become more standardized and raise the bar for the whole industry.
"IFRS implementation and company infrastructure changes are not isolated, Mr. Lynch said. "U.S. insurers that want to keep up will not turn a blind eye by thinking IFRS will only impact companies abroad. If your competitors are making changes to improve business, get on board or risk falling behind."
The Financial Accounting Standards Board will be issuing the Discussion Paper in the United States to determine whether to join the project and converge U.S. insurance accounting practices with the emerging IFRS standards, creating an even stronger imperative for U.S. insurers to improve risk management in order to keep up with the market, he said.
Among the issues facing property casualty industry, he explained, is the possible discounting of reserves and the so-called "fair valuing" of liabilities.
Mr. Lynch said the domestic industry contends that since there is no ready market for insurance liabilities, it is impossible to use anything other than a historic basis.
In a presentation earlier this year to the IASB, Jerry de St. Paer, chief financial officer for XL Capital, said "the range of values of outcomes is often impossible to estimate with any accuracy."
While this may be fine for solvency and economic capital calculations, "this fails the test for general purpose, market consistent financials."
Mr. Lynch said the domestic insurers have a couple of years to make their case to the European standard-setters and ultimately those in this country.
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