Accounting change could transform insurers' access to funds

New accounting standards could improve insurance financial reporting and transform the relationship between insurers and investors.

The International Financial Reporting Standard (IFRS) 4 on insurance contracts, which has been a decade in development, has been published by the International Accounting Standards Board (IASB) as an exposure draft.

It calls for more transparency in reporting and “brings insurance into the mainstream of financial reporting”, potentially improving the attractiveness of insurance for investors.

James Dean, global IFRS insurance leader at Ernst and Young, said: “Without doubt, IFRS 4 will create a level playing field for the insurance industry, providing all financial statement users and preparers—from policyholders to investors to analysts, competitors and regulators—with greater comparability and transparency about performance as a direct result of the consistent measurement and presentation models brought in by the standard.

"If the standard is well implemented, you remove the uncertainty and go into the mainstream. It could lower the cost of capital and correct a situation where insurers’ shares are undervalued.”

Once transitioned into a standard—expected in 12 months’ time—IFRS 4 could replace a collection of generally agreed accounting principles (GAAPs) with a single IFRS for all insurance contracts. To date, insurers have been relying upon the GAAP of their individual countries or elements of US GAAP.

Accounting companies specialising in insurance said that while it could be two years from implementation, it cannot be ignored. Accountants stress that insurers must act now to educate their senior executives and line managers about the scope of the changes.

Gail Tucker, a partner at PricewaterhouseCoopers, said: “Boards will have to get involved because the key performance indicators and the income statement will simply look very different.

“In theory, the changes will make things much more transparent with regard to performance measurement as insurers will need to explain their results more clearly to the end users.”

Because of the level of change anticipated, a small number of insurers have carried out GAAP analysis on what changes would have to take place.

David Foster, in Ernst & Young’s EMEIA Financial Accounting and Advisory Services Group, said: “Insurers will need to work out how they will address the double challenge of implementing IFRS 4 and Solvency II.”