Insights into IFRS Insurance - Greater certainty for new insurance accounting rules
By Francesco Nagari - December 20, 2012
The unprecedented scale of the reform to achieve consistent profit reporting across the global insurance sector is now fully visible. Preparing for the multi-year implementation effort is an imperative for all insurance companies immediately after their 2012 earnings release next year.
A substantial leap forward
During November the International Accounting Standard Board (IASB) has made a substantial leap forward in removing the uncertainty that surrounded, for the past several months, the timing and content of the fundamental reform of financial reporting rules for insurance companies.
The repercussion of these new decisions is about to produce a significant impact across the global insurance sector, since insurers’ major concern around uncertainty has been addressed. Some of the global software houses have already invested thousands of man-days in the development of solutions to address this challenge and ‘first-movers’ are already developing an approach to the implementation challenges.
The timetable for adoption
The IASB decided that the IFRS 4 – Phase II ‘Insurance Contracts’ will be effective approximately three years after its publication date. No changes have been made to the mandatory effective date of IFRS 9 ‘Financial Instruments’ which remains 1 January 2015. Finalisation of Phase II Insurance Contracts is currently targeted for 2014 which results in a mandatory effective date of 1 January 2017 – one year later than anticipated prior to this recent round of decisions. The IASB acknowledges that this date may slip by a further year to 2018 if the final IFRS is released towards the very end of 2014.
Changes on insurers’ reporting from IFRS 9
The changes that IFRS 9 will bring to financial institutions are extensive. They arise from the strong political drive that followed the financial crisis of 2008-09 and the aims of changing the incurred loss model for impairment to a new measure of expected losses that incorporates a broader range of available forward looking credit information and a new approach to financial assets classification.
New insurance accounting rules nearing completion
The IASB has largely completed all of its deliberation on the new rules for insurance liabilities. In the past few weeks they formulated the approach that would be used for the transition to the new rules. The next few months will be used to continue the outreach on the current proposals and the drafting of the final rules that should be published in the spring of 2013 as a new exposure draft.
Convergence with the United States is unlikely
The likelihood of a convergent outcome for the insurance accounting reform that would bring together the U.S. with the rest of the world is declining.
The activity of the IASB with its U.S. counterpart, the Financial Accounting Standards Board (FASB), has now evolved to a phase that sees the two standard setters actively completing the common elements of their respective reform projects with a tacit acknowledgment that the publication of the new IFRS draft, in parallel with the first draft of the new U.S. rules next spring, will mark the start of a standard setting completion work that the IASB and FASB will complete independently from each other. The positions expressed by the U.S. insurance sector may influence the FASB’s objective to reform their existing insurance accounting.
The interaction with the European Union Solvency II reform
Against the increasing clarity of the timing and scale of the IFRS challenge it is becoming less certain for European Union (EU) insurers how this challenge will interact with the expected delays on the adoption of Solvency II, the new insurance capital reform that the EU has been developing for most part of the last decade.
The liabilities valuation rules that are part of the Solvency II reform have been developed from earlier versions of the new IFRS for insurance liabilities and the degree of overlap with the most current IFRS rules remains substantial. On the assets side, Solvency II imposes insurers to fair value all of their investments: a different approach to the new IFRS requirements. Considering the advanced stage of preparation that many EU insurers have achieved for Solvency II and the extremely limited amount of work done to date for the new IFRS rules an imperative is emerging that their Solvency II systems must be made as compatible as possible with the new IFRS requirements for assets and liabilities if cost efficiencies are to be achieved.
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Francesco Nagari is the Global IFRS Insurance Leader and a partner in Deloitte LLP based in London. Francesco is known as a professional who combines extensive IFRS experience in the field of insurance accounting and capital regulation with international industry knowledge and practical experience on the other issues that affect insurers’ financial and solvency reporting. He has 20 years of insurance accounting and business experience with a deep knowledge of some of the key European insurance markets, capital regulations, and products.