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IASB looks to update insurance accounting standard

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LONDON—An updated international accounting standard for insurance should make insurers' accounts more comparable and transparent, experts say.

The International Accounting Standards Board in late July published a draft of the international accounting standard that the IASB said aims to ensure greater consistency and comparability of insurers' accounts and make them easier to understand.

The London-based IASB, whose standards are required or permitted in about 100 countries, began a project six years ago to simplify the way insurance accounts are presented. The first phase of that project in 2004 produced International Financial Reporting Standard 4—an interim standard that allowed many existing practices to be retained, according to the IASB.

Phase 2 of the project will produce an updated standard that aims to make it easier to understand the financial position and performance of insurance companies when reading their financial statements. That standard, on which public comments will be accepted until Nov. 30, is slated for publication in 2011 and implementation in 2013.

“A fundamental review of insurance accounting was long overdue, with current practice resulting in financial information that is impenetrable to all but the most expert of users,” Sir David Tweedie, chairman of the IASB, said in a statement of the proposed standard.

The U.S. Financial Accounting Standards Board has been working with the IASB on the project and is slated later this summer to produce its own draft that is expected to differ slightly from the IASB's.

Among proposed changes to IFRS 4 is introducing a model that would focus on an assessment by an insurer of the amount, timing and uncertainty of future cash flows that are generated by existing insurance contracts. The model would generate information about the changes in the insurance liability faced by the insurer over the term of a contract.

The standard also would require insurers to reflect changes in cash-flow estimates in their profit or earnings statements during the period in which they arise.

Today, many insurers use “locked-in estimates” that do not provide current information about liabilities, the IASB said.

Also under current practices, there often is a mismatch between assets backing insurance liabilities, which are measured at their current value, and those liabilities, the IASB said.

The standard would require liabilities to be measured in a way that would reflect economic changes, the IASB said.

The standard also would require insurers to incorporate and disclose information about a specific risk adjustment in their liabilities. This risk adjustment would be evaluated anew at the end of each reporting period.

The Brussels-based Comité Européen des Assurances, which represents insurers and reinsurers in Europe, welcomed the proposal. The IASB insurance standard would “better reflect the economics of insurance contracts in the way they are measured and reported,” said Benoit Malpas, technical manager at the CEA, in a statement.

The consistency of reporting under the standard “will allow comparability among peers, which was one of the main requests from users of financial statements,” Mr. Malpas said.

“Without doubt, IFRS 4 will create a level playing field for the insurance industry, providing all financial statement users—from policyholders to investors to analysts, competitors and regulators—with greater comparability and transparency,” said James Dean, global IFRS leader at Ernst & Young L.L.P. in London.

The standard likely would increase transparency as insurance reporting is inconsistent across jurisdictions and often difficult to understand, said Gail Tucker, a partner at PricewaterhouseCoopers L.L.P. in London.

The standard also would fit well with the upcoming changes being introduced with Solvency II, the proposed risk-based capital regulatory regime slated for introduction in the European Union at the end of 2012, she said.

There are similarities in the measurement of assets and liabilities in the proposed standard and Solvency II, but there also would be differences, said Frank Ellenbuerger, a partner at KPMG L.L.P. in Munich.

He said KPMG believes it would be better if these changes could be limited to areas where the standard and Solvency II have different objectives.

Insurers should begin planning now for the introduction of the standard, which likely will require them to reorganize their data or use new models, said Francesco Nagari, global IFRS leader at Deloitte L.L.P. in London.

While the introduction of the IASB standard may cause “short-term pain” for insurers, it will lead to “long-term gain” if the increased transparency of financial performance results in a reduced cost of capital, said Mr. Dean.

The exposure draft is available at www.ifrs.org.