Harmonized accounting standards for insurance slow going, but will benefit industry

Efforts to forge common, international accounting standards for insurance are taking longer than expected but will ultimately yield benefits for the industry, Swiss Re Ltd. concludes in its latest sigma study, released Wednesday.

Although the London-based International Accounting Standards Board and the Norwalk, Conn.-based Financial Accounting Standards Board have been working on convergence since 2002, a recent request for additional industry feedback from the IASB indicates a single global accounting standard for insurance is unlikely to emerge “anytime soon,” said Kurt Karl, chief economist of Swiss Re.

“The IASB's decision to reconsult highlights the continued willingness to move these reforms forward, but realistically it means that new international accounting standards for insurance are now unlikely before 2016,” Mr. Karl said in a statement.

The sigma study notes that one of the primary challenges in converging U.S. and global accounting standards revolves around valuation.

“In order to prepare their financial statements, companies need methods to value their assets and liabilities and to recognize associated revenue and expenses,” the report states. “At face value, this would seem straightforward. But in fact it raises significant questions concerning valuation and measurement.”

Moreover, while the question of valuation is not unique to insurance, it is arguably more acute in insurance than in many other industries. “A key challenge is that future cash flows stemming from insurance contracts are difficult to estimate in advance and hence it is hard to place a value on them,” the study states.

Darren Pain, senior economist at Swiss Re and co-author of the sigma study, said that, challenges aside, changes in financial reporting could bring potential benefits for insurers.

“The new accounting standards should encourage insurers to be more open about the source of uncertainty surrounding their estimated assets and liabilities as well as the rewards for bearing risk but, to foster improved transparency, additional reporting metrics will probably be needed,” he said in a statement.