While insurers eagerly await the release of international financial reporting standards (IFRS) from the International Accounting Standards Board (IASB), which have been in the works for more than a decade and are finally nearing completion, they are stuck in a wait-and-see mode, according to a new report from Deloitte, wherein many concerns are festering.
A main concern surrounds the complexity of the insurance industry’s accounting and its inaccessibility for interested investors.
“We risk losing investor confidence as an industry because of the very complicated reporting bases and metrics that we use, and the fact that this makes comparability between institutions very difficult,” said Tim Tookey, CFO with Friends Life, in the report.
Gerald Harlin, CFO at AXA, added: “If the market valuation of the insurance industry is low, it’s partly because it is so complex.”
The IFRS has done little to mitigate this concern for insurers, releasing standards surrounding only the most basic areas, IFRS-4, in 2004.
While insurers wait for IFRS 4 Phase II and other corresponding standards that may or may not cause the industry to abandon native standards from the Financial Accounting Standards Board (FASB)—47 percent of respondents in an accompanying survey from Deloitte want the United States to abandon them—uncertainty remains the biggest concern according to Deloitte.
More than half of respondents said “uncertainty around the timeframe of the new standard” was one of their top three concerns surrounding both IFRS insurance contracts and financial instruments. The next concern, with more than 45 percent of respondents in both categories, was “potential for increased earnings and/or capital volatility.”
In the United States, zero respondents indicated that they had started work on an IFRS insurance contract project. Sixty-three percent said they would start on such a project when the new standard is finalized and 23 percent when the United States accepts it as standard.
Eleven percent of Western European insurers and a mere two percent of U.S. insurers have begun investor engagement programs. Furthermore, half of the respondents who rate the insurance contracts as “high-impact,” in terms of the implications for their business, have not conducted a business impact assessment, while nearly one-quarter (24 percent) of the largest companies have not allocated a budget to the transition.
The report acknowledges “uncertainty over the final form of each standard is making it hard for insurers to estimate the level of change required in their reporting, actuarial and risk management systems.
In addition to logistical uncertainties, many respondents doubt that the benefits of the transition will justify the cost.
Indeed, insurers have been waiting a long time for a standardized international accounting standard, however as its arrival nears, doubt overshadows optimism.
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