IFRS: Insurers plunged into uncertainty

By Alain Thériault | August 12 2010 03:48PM

The Canadian life insurance industry has been plunged into uncertainty thanks to the delay in consultations surrounding new accounting standards. Because of this delay, insurers still do not know what accounting standards they are supposed to apply in the second quarter of 2011 to calculate their liabilities.

At the time of writing, in mid-June, the consultation paper outlining the new accounting standards that apply to the life insurance industry had still not been published. The international accounting watchdog, the International Accounting Standards Board (IASB), is the organization responsible for publishing the new rules applicable to insurers. Given its overloaded agenda, some believe that the IASB will not be able to meet its deadline.

Initially expected in March, publication of the proposals was pushed back in April and then again in May. The IASB later said that the document would appear in June. However, several stakeholders have told The Insurance and Investment Journal that the consultation paper probably won't appear until July.

On the other hand, the implementation of the new International Financial Reporting Standards (IFRS) for insurance contracts is expected in the second quarter of 2011. So insurers have little time in which to determine how to calculate their liabilities.

Peter Martin, director of accounting standards at the Canadian Accounting Standards Board, believes that the insurance sector could be disadvantaged by the delay. Outside the insurance industry, he says people are not paying much attention to the standards, and suggests that the IASB will first focus its attention on formulating the rules that will apply to the largest number of industries. "If the IASB needs to delay something, it may be the insurance standards," says Mr. Martin.

Beginning in 2011, the IASB intends to replace its temporary standard with a final one that will provide a basis to account for long-term insurance contracts.

But the second phase of standards for insurance contracts is not the only IASB project to attract the industry's attention. The standard that will require companies to assess all balance sheet elements using market value will also be dealt with in a discussion document in the second quarter.

Insurers are still upset by this measure, which will require a company to disclose its future financial obligations based on their current market value.

The discussion paper on the standard that will dictate how to handle liabilities related to insurance policies owes some of its complexity to the large number of related standards that it will revise - this includes disclosure standards, standards related to the classification and measurement of financial instruments, as well as standards dealing with the impairment of assets and intangible assets.

In addition, several other IASB projects are lined up, waiting to be heard. Even if they address every economic sector in the world, some of them will also affect Canadian insurers, explains Mr. Martin. He believes the most important are the consolidation rules, some of which are expected in June and the rest in the fourth quarter of 2010. These standards will deal with the question of control and disclosure of a parent company's results with those of its subsidiaries.

The different standards that apply to financial instruments, mentioned earlier, are also anxiously awaited. They will include standards governing the de-recognition of assets and liabilities on financial statements, as well as standards on hedging strategies. Each will be the subject of a discussion document, which is slated to appear in June or perhaps sometime in the third quarter.

Fears in Canada

Canadian insurers are far from indifferent to the new IFRS rules. At Manulife Financial's annual general meeting, the company's president and chief executive officer Donald Guloien commented on the subject once again. He had already indicated that the IFRS changes would bring lifetime guarantee insurance products to an end if they were implemented in their proposed form. At the shareholders meeting on May 6, he repeated that insurers are most worried about the Phase II reforms which are slated for 2013.

The Insurance and Investment Journal contacted Lynda Sullivan, Executive Vice President and controller at Manulife. She chairs an insurance advisory group established by the IASB. The group consists of 23 members from all over the world, including one other Canadian, Tom Kornya, a partner with Ernst & Young.

Ms. Sullivan is quick to point out that the Canadian life insurance industry has been involved in developing valuation standards for liabilities linked to insurance policies since 2006. However, given the difficulty of the task, there is still no such standard. That is why the rules involving insurance policy liabilities will not come into force until the second IFRS phase in 2013. Europe has had its own standards since 2004, she adds.

The committee's role is therefore to help the IASB complete the job while still respecting, as much as possible, the fact that the nature of insurance products varies from country to country. "It is a very complex topic," says Ms. Sullivan. "We have to make sure that the IASB has the correct understanding of the application to the long duration guarantee products that are offered in the North America. The original thinking started in Europe, a long time ago, on the short duration products. We believe [Canada] has one of the strongest models."

She fears that a standard based on short-term guarantees could have unintended consequences for the Canadian insurance business. Ms. Sullivan says she has been supported by several associations and insurance companies in Canada and in the United States in her efforts to make certain that the future standard takes the North American reality into account.

She also points out that the document the IASB plans to publish is an exposure draft, and not a final standard. "The exposure draft is for more comments and more feedback. It's not the final standard. It will be our first chance to give further advice before they move to the final standard."