The Bruce Column — Bringing long-term order to insurance reporting
20 Jun, 2013
The new exposure draft on insurance contracts from the IASB has been long and painstaking in the making. But, as our resident columnist Robert Bruce explains, it will help bring long-needed consistency and transparency to the industry.
The world of insurance has always been a difficult one for financial reporting. It is often said that financial reporting in the insurance business is largely lost inside what has become popularly referred to as a black box. No one quite knows what is inside and comparability is in short supply.
Why so? It is because, at present, the industry operates under a patchwork quilt of accounting practices, some of which date back to the days before IFRSs were introduced and which were, in effect, stitched together and grandfathered when IFRS 4 was introduced as an interim measure.
This is why trying to enable transparency in both profit reporting and the estimation of the inherent uncertainty of insurance cash flows was never likely to be easy. Regulators have warned that in an era of low interest rates some of the insurance industry may still be working off estimations of a return on assets which will not be achieved. But, under the current system of financial reporting, it may not be obvious.
At its heart this new exposure draft introduces change in limited areas with the IASB sticking with its previously exposed ‘building blocks’ approach, which deals with the measurement of the insurance contract. By requiring the measurement of the liability using current interest rates the proposed new standard will give investors and policy holders a much clearer and more reliable view of what is happening. It is fundamental. But of course it is not just about measurement. Matching assets and liabilities is a key feature of an insurance business and a faithful representation of the extent to which an insurer achieved that is obviously very important.
The new model will be a big change to implement and it will all take time to make this work. Extensive new data will be required for the transition, and for measurement in the future. Investment in technology is likely to be required as the result of the need for actuarial and accounting systems to be enhanced or developed to cope with the new financial reporting demands.
This is why the IASB is planning to give everyone around three years leeway from the publication of the final standard to get their implementation straight. But wiser souls may find that early planning for what is to come will make life easier in the long-term. Not that different from the basis of insurance itself.
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