Two developments in insurance accounting mean it will be a busy time for members of the Financial Reporting Group of the IFoA this autumn.
Firstly, the International Accounting Standards Board (IASB) has released its proposals for improvements to Insurance Contract Accounting. This will apply to those insurers who have adopted international financial reporting standards (IFRS), including all listed insurers. This follows an earlier exposure draft in 2010 and a discussion paper in 2007.
The proposals represent a very significant change for insurers, introducing for the first time a comprehensive accounting standard for insurance contracts. The IASB proposes that insurance contracts are measured using a market consistent current value approach. The measurement has two components:
? a measurement of the amount, timing and uncertainty of expected future contract cash fulfilment flows; and
? a contractual service margin representing a current estimate of expected profitability.
The proposals include a number of matters that are likely to be controversial, including:
(i) a proposal to recognise in the P&L account interest expense determined using the discount rate that applied at the date the contract was initially recognised and recognising in other comprehensive income (OCI) the difference between the contract liability measured at current discount rates and the discount rate at initial recognition;
(ii) premium revenue should be presented based on an 'earned' basis, and both premiums and incurred claims should exclude investment components;
(iii) with-profits and unit-linked business will be subject to a separate 'mirroring' approach that will require cashflows to be split between those varying directly with asset returns, cashflows varying indirectly with asset returns and fixed cashflows.
If adopted as proposed, then the effect on insurers' business models, products and accounting systems might potentially be as significant as that of Solvency II.
An open forum at Staple Inn, London, on 12 September will provide an opportunity for members to discuss the issues raised by the new exposure draft and provide input to the IFoA's response.
Secondly, the Financial Reporting Council (FRC) is consulting on some more immediate changes to accounting for insurers within the UK generally accepted accounting principles (GAAP) regime (see bit.ly/19L8php). This extends the new GAAP regime laid out in FRS 100 - 102 to insurance, consolidating existing financial reporting requirements, and will become effective from 1 January 2015. The requirements are based on the current requirements of IASB's IFRS 4 Insurance Contracts, the existing requirements of FRS 27 Life Assurance and elements of the Association of British Insurers' Statement of Recommended Practice on Accounting for Insurance Business. The single largest change though is probably already effected by FRS 102, which will require insurers to differentiate between insurance and investment contracts.
The IFoA expects to prepare a response for the FRC by their deadline of 31 October 2013.
