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With the International Accounting Standards Board recently releasing a discussion paper on Phase II of its Insurance Accounting Project, European insurers are getting a better idea of the challenges they'll face in implementing new regulations on systems, data, pricing and capital management. U.S. insurers will likely be affected by the new accounting principles as well, though, and should pay attention to what's going on across the Atlantic, according to Richard Lynch, a partner in the Global Insurance Center of Ernst & Young L.L.P. in New York, who recently discussed the developments.
Q: Even though this is a European accounting initiative, is it likely that U.S. insurers will feel the impact of the new International Financial Reporting Standards being developed in Europe?
A: It definitely will impact them. I think some of them obviously have caught on that they're going to have to follow this.
There are a couple of projects that are also happening right now with regard to this. I think the insurers need to be monitoring this and following this. I think there needs to be some understanding of what's happening with these projects. There also needs to be some understanding of what's happening with the overall framework itself, what's happening with regard to accounting standards.
Q: Are there any U.S. insurers that would be affected more than others by these changes, either particular types of insurers or large companies vs. smaller ones?
A: I'm not sure size would matter because the accounting model would be the same. The issue sometimes with size is the complexity of products that larger companies might offer.
The one thing that's going on in the international world is they're trying to come up with a smaller company-type model that the smaller companies could follow. That's in the very early stages.
The issue in the U.S. is we would never extend that to insurance because insurance is regulated by the state regulators and they generally don't give breaks to smaller insurers.
Property/casualty vs. life insurance, that's interesting. I think the life companies think it might be a little more challenging because of the guarantees in a lot of their products. So the challenge might be slightly different.
Q: What are the potential benefits of these accounting changes?
A: The IASB thought that if they did some of this it would take away some of the uncertainty that exists among the users of financial statements. To some extent, the people who look at insurance financial statements question whether they reflect what's happening.
(Insurance companies) are penalized for having a very complex model that people don't understand. If they can get to a more common model, they can communicate better to the users of financial statements what the statements mean. In another area, it might add some clarification to the utilization of reinsurance.
The biggest benefit is for users of financial statements to be able to compare financial statements of different companies on a more global basis, which is something they are unable to do with insurance companies now.