Impacts on insurers from the coming move to International Financial Reporting Standards will involve every aspect of a company's business and create increased transparency and possibly more mergers, according to a consulting firm report.
The study by New York-based Deloitte found that IFRS will also lead to "dramatic change" in insurance products, investment strategies, risk management and securitization.
The report, "The IFRS Journey–A Look Beyond the Accounting Changes," advises that a proactive approach to IFRS implementation will help insurers avoid being unprepared for the industry-wide shift and allow them opportunities to differentiate from their competition.
According to the study, IFRS is gaining acceptance in the United States and is already impacting many companies.
It noted that in November 2007, the Securities and Exchange Commission eliminated the requirement for foreign firms using IFRS to reconcile financial statements to U.S. Generally Accepted Accounting Procedures.
Deloitte said it is expected that U.S. firms will have the option of using IFRS by 2010 or 2011, and that the SEC may issue a "proposing" release to that effect this year.
The firm noted a survey it had taken showing approximately 30 percent of company chief financial officers and senior financial professionals would consider adopting IFRS if given the choice by the SEC.
"The growing acceptance of IFRS as the global standard is placing pressure on U.S. and international companies not using IFRS to consider making the transition. For insurers, the process becomes even more complicated due to the unique handling of insurance contracts and associated risk under the new guidelines," said a statement from Rebecca C. Amoroso, Deloitte's national Insurance leader.
"IFRS could provide insurers with new insight into the profitability and risks of their business which, when used to develop strategy, can be invaluable," added Ms. Amoroso.
According to the report, the information made available by adopting IFRS reveals more about the profitability of new business when it's written, as well as the risks and uncertainties associated with individual business lines and portfolios, to competitors.
Modeling of liabilities, especially for non-life products, will be more complicated because these lines have weak observable market data, high volatility and potentially large payouts, Deloitte said.
According to the study, a fair value-like approach to measuring liabilities under IFRS will encourage insurers to reduce asset-liability mismatches and focus more on their investment strategies.
IFRS, the report said, will create opportunities to improve internal controls, and increased transparency will support improved risk management.
The international reporting standard may act as a key catalyst for insurance-linked securitization, including securitization of closed books of business, said Deloitte.
Merger and acquisition activity may be encouraged by IFRS and may play a major role in improving the quality of the M&A process by adding value at each stage of the process, according to the study.
Deloitte said IFRS could cause significant requirements for investment in new technology and "undoubtedly will cause a talent gap in the CFO suite, regulatory bodies, accounting, actuarial practices and the SEC."
Over the longer term, the report said IFRS will promote much greater cross-border mobility of people by removing the differences between national accounting systems.
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