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LONDONThe International Accounting Standards Board has launched a public consultation on accounting for insurance contracts.
The public consultation will last for six months and is intended to enable the IASB to "[develop] firm proposals for an exposure draft to be published towards the end of 2008." There will then be a further period of consultation and the IASB expects the new standard to be implemented in three years' time.The publication of its preliminary views in a discussion paper marks the latest stage of the consultation which began three years ago with the establishment of an Insurance Party Working Group.
Warren McGregor, IASB member, explained that what is being proposed in the document is the identification of "a transparent model" to deal with the liability side of the contracts.
"There are three fundamental building blocks [in the consultation paper] that are essentially promises by the insurer," he said. "The model should in the first instance require the insurer to make an estimate of future cashflows in terms of timing, amount and probability. Having done that, there needs to be an adjustment made for risk because estimates can of course be wrong. And finally there needs to be a discount on the cashflows back to the present because money has a time value," said Mr. McGregor.
Mr. McGregor said that the industry had so far been "broadly supportive" of the model. Alex Finn, partner at PricewaterhouseCoopers, said in a statement that, "the IASB's move towards a single global accounting standard for insurance is an important step in what is a vital project for improving the quality, transparency and comparability of financial reporting for this sector."
"There has been a general acknowledgement that the industry needs a high standard which can be applied across the world. Insurance companies are underpriced in the market, and they are looking to the IASB to remove some of the uncertainty so that investors can better price their capital," Mr. McGregor suggested.