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The report summarizes more than 158 letters written in response to the issues presented by the IASB’s discussion paper (DP), “Preliminary Views on Insurance Contracts,” which were posted to the IASB’s Web site, some running from five to 50 pages each.
Prepared for a consortium of the world's most influential insurance trade bodies, the report’s summary indicates differences of opinion on how the standard should be drafted and implemented, often depending on geography, regulatory environment or industry sector.
Consortium members include the following organizations:
- American Council of Life Insurers
- American Insurance Association
- CFO Forum
- European Insurance and Reinsurance Federation
- Group of North American Insurance Enterprises Inc.
- Life Insurance Association of Japan
- National Association of Mutual Insurance Companies
- Property Casualty Insurers Association of America
- Reinsurance Association of America
The DP proposes three building blocks for the measurement of insurance liabilities: cash flows, discount rates and margins. Respondents broadly agreed with an approach to measurement for life insurance similar to the building block approach, but disagreed on the specific definition and application of those components.
Among its many topics, one area of consensus occurred in respondents’ belief that accounting for insurance should reflect the economics of the business. There is little support for current exit value, as defined in the DP, without potentially substantial modifications. Many respondents do not agree that the transfer concept is appropriate for valuing insurance liabilities. The "value in settlement" measurement attribute, supported by many, emphasizes ultimate settlement since contracts are not likely to be transferred, but paid or settled by the company in the future.
The report summary said that respondents generally:
- Do not agree with unbundling
- Do not agree with reflecting credit characteristics of liabilities
- Want to avoid accounting mismatches
- Want consistent accounting treatment for investment contracts
- Consider the topics of presentation and disclosure and of measurement as critical to each other
Further, respondents generally favor use of entity-specific cash flows, but do not all agree with a requirement for using probability-weighted cash flows, except as needed to recognize optionality in contracts. Respondents also had differing views on calibrating margins to premiums and request clarification on the objectives and intent of margins, strongly disagree with constraints on cash flows or on reflecting policyholder behavior, and had differing views on discount rates, generally supporting either market rates or earned rates.
James Dean, practice leader for Ernst & Young's Global Insurance Center and one of the leaders of the review team, comments, "Whatever final insurance standard the IASB develops will result in a fundamental change in the finance and actuarial functions of many insurance companies. Understanding the impact on systems, data, pricing and capital management will be a major challenge. Insurers should start now to examine how this will affect their financial systems and statements. The impact will be truly life changing for many organizations."
Source: Ernst & Young
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