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June 23, 2013 9:09 pm
Out of confusion comes ... an awful lot of complex debate. There is no doubt that new standards for insurance accounting are needed. Investors confront a mish-mash of individual country rules. The main international standard-setter, the International Accounting Standards Board, and its predecessor have been working on a new regime since 1997 and utilising “stopgap” rules (with big limitations) for almost a decade.
The IASB is right to push the industry towards a fair value rather than historic-cost approach. Contracts in the insurance industry may be peculiarly diverse owing to national, cultural and regulatory differences – and, in the life sector, very long term. But investors are not well served if these are valued using age-old market conditions and interest rates.
The worry in the industry, or at least in parts of it, is the amount of volatility that the new regime will bring in its wake. When the IASB published the latest iteration of its proposals last week, it introduced some refinements to quell insurer opposition, but it also acknowledged that these will carry a cost in terms of complexity. Even so, the proposed changes will be profound.
Start at the first line of the income statement, for example. Insurance contract revenue, which would exclude any investment component, would be allocated over the period of the coverage in proportion to the value of services provided in each period. That is very different from today’s widely used premium figures.
If all this comes to pass by the 2018 target date, investors will face a sharp learning curve. But they should be grateful. The proposals promise more transparency and, with IASB standards mandatory in the EU and used by more than 100 countries, there will be more scope for international comparisons. One big worry remains. Given the complexity of the issue, the haggling may be far from over.
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