Insurers Mostly Back IASB Contract Accounting Plan

There is strong industry support for a proposed international model to standardize how insurers' financial transactions are accounted for on their balance sheets, according to a study of formal comment letters by a consulting firm.

New York-based Ernst & Young said it reached that conclusion after a study of 94 of 162 comment letters, many running up to 50 pages, that were submitted to the London-based International Accounting Standards Board (IASB) that put forward the model in a discussion paper.

In a report released today, Ernst & Young found that, overall, the insurance industry and its constituents' comments solidly backed a high-quality global insurance standard, with many referring to it as much needed. There were some differences of opinion on how the standard should be drafted and implemented, often depending on geography, regulatory environment or industry sector.

Ernst & Young's study was commissioned by nine big trade groups from the United States, Europe and Japan.

Those organizations are: American Council of Life Insurers (ACLI), American Insurance Association (AIA), CFO Forum, European Insurance and Reinsurance Federation (CEA), Group of North American Insurance Enterprises Inc. (GNAIE), Life Insurance Association of Japan (LIAJ), National Association of Mutual Insurance Companies (NAMIC), Property Casualty Insurers Association of America (PCI) and the Reinsurance Association of America (RAA).

James Dean, practice leader for Ernst & Young's Global Insurance Center and one of the leaders of the review team, noted in a statement, “Whatever final insurance standard the IASB develops will result in a fundamental change in the finance and actuarial functions of many insurance companies.”

“Understanding the impact on systems, data, pricing and capital management will be a major challenge. Insurers should start now to examine how this will affect their financial systems and statements. The impact will be truly life changing for many organizations,” he said.

The study, Ernst & Young said, found broad areas of consensus showing that, collectively, the industry and others believe accounting for insurance should reflect the economics of the business.

There is little support for current exit value (CEV), as defined in the IASB discussion paper, without potentially substantial modifications. Many respondents do not agree that the transfer concept is appropriate for valuing insurance liabilities, according to the comments examined, the firm said.

The “value in settlement” measurement attribute supported by many, Ernst & Young said, emphasizes ultimate settlement since contracts are not likely to be transferred but paid or settled by the company in the future.

IASB's paper proposes three building blocks for the measurement of insurance liabilities: cash flows, discount rates and margins. Respondents, according to Ernst & Young, broadly agreed with an approach to measurement for life insurance similar to the building-block approach, but disagreed on the specific definition and application of those components.

Robert Stein, of the Global Insurance Center, Ernst & Young, commented: “Our primary objective was to provide a clear and unbiased view of the responses submitted to the IASB. Furthermore, dialogue that took place with several of the authors of those letters allowed us to gain a deeper understanding of the issues and alternative views expressed by them.”

His firm found there are concerns about the timing of developing such a standard in relation to other IASB projects and also its relationship to other industries that might be materially affected.

The majority of respondents commenting on timing issues, it was found, favor advancing other IASB projects first, while, in contrast, others support accelerating this discussion and not waiting for convergence with U.S. Generally Accepted Accounting Procedures.

However, Ernst & Young said, there was consensus that all IASB projects should be coordinated to avoid conflicts, and almost every organization called for field testing.

The discussion paper, titled “Preliminary Views on Insurance Contracts,” was issued by IASB in May 2007 and outlines preliminary views on the main components of phase II of the IASB's model.

The deadline for comment was Nov. 17, 2007, and the letters are posted on the IASB Web site. Ernst & Young said that due to the need for wide consultation and the time required to complete the exposure process, a draft standard is unlikely to be put out before 2009.

The consulting firm said global insurance organizations' reports currently utilize various national Generally Accepted Accounting Principles and, as a result, it is difficult to compare financial statements across the industry–and in some cases, within a multinational company.

This lack of comparability and transparency is increasing the insurance industry's cost of capital and driving rating agencies, analysts and investors to demand significantly more information outside of the audited financial statements, Ernst & Young said.