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18th July 2012

Survey indicates insurers views on a single global accounting framework

A need for increased financial reporting transparency and consistency has led to more insurers calling for a single global accounting framework, says a new survey of insurance finance executives conducted on behalf of Deloitte by the Economist Intelligence Unit (EIU).
Deloitte’s survey found nearly half of insurers want to see a convergence of the two main accounting regimes used by global insurance companies. 47% of respondents said they want the US to abandon its national accounting standards in favour of International Financial Reporting Standards (IFRS). However, a complete set of IFRS rules for insurance liabilities does not exist yet and US Generally Accepted Accounting Principles (US GAAP) on the same subject has been earmarked for a radical reform since 2008.
Proposals to address this situation and substantially re-write accounting standards commonly used by insurers for liabilities and investments are being finalised jointly by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). Despite significant progress, the boards have struggled to reach an agreement on all issues. This has resulted in a slip in timetable for implementation of what could be heralded as the first set of global accounting rules for insurance companies.
Given the potential consequences these rules will have on insurance companies, more than half of respondents rated the uncertainty around the timeframe for implementation of the new IFRS for insurance contracts (IFRS 4 Phase II) (51%) and for financial instruments (IFRS 9) (52%) as their biggest concern. However, many insurers are stuck in a ‘wait and see’ mode, with 56% saying they will wait until the standards are final before starting their projects to implement the new rules.
Francesco Nagari, global IFRS insurance leader at Deloitte, said “The extended uncertainty surrounding the completion of a converged insurance project has hampered insurers’ desire to prepare for this major implementation challenge. Several insurers in our survey said they will be able to look at the business impact of the standards only from next year. This implementation will be a considerable undertaking in terms of IT systems and processes, not to mention the effect on investors’ perception of insurers’ profitability.
“There are obvious benefits from a single set of accounting standards. If the implementation is well managed an insurer could use the increased transparency and global consistency in terms of company reporting to its advantage. The new rules will level the playing field for investors who would be able to compare insurers globally and with other companies in different sectors. Today’s insurance reporting is fragmented and it creates a barrier for general investors to consider insurance shares. This results in a higher cost insurers have to pay when they want to raise capital and the new accounting rules could address this issue. Indeed, many insurers are considering whether the benefits justify the costs. Insurers have pushed long and hard for an accounting regime that meets their needs. Now they just need to make sure it delivers the benefits.”
Additional survey findings showed:
-11% of Western European insurers surveyed, and virtually none (2%) in the US have started investor engagement programmes.
-One-half of the survey 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%) of the largest companies have not allocated a budget to the transition.
-Executives at two-fifths of insurance companies surveyed say their board has no awareness of or involvement in these accounting changes.Following figures released yesterday by Deloitte - which indicate a number of insurance companies are Charles Juniper, senior analyst, insurance financial services technology at Ovum comments:
-Solvency II has driven a shift in the mindset of insurers and in their IT departments in particular
-Solvency II was a major IT challenge for many European insurers; however most have made huge strides in delivering on its requirements
-Insurers are seeing beyond Solvency II, with some using their newly acquired ability to have an accurate, detailed and real-time view of their risk, liabilities and investments as a tool to better target new business and utilise their underwriting capacity more efficiently
-A single global regulatory and reporting regime would bring cost cuts for insurers and drives a more dynamic and competitive global insurance market to the benefit of consumers and businesses.