Standards for insurance contracts: not before 2015

By Alain Thériault | March 07 2012 09:31PM

Under pressure from the United States, the International Accounting Standards Board has postponed the application of new standards for insurance contracts until 2015.
With guaranteed products already under pressure from low interest rates, insurers regard the new accounting standards for insurance contracts with a jaundiced eye. The standards come from Europe, where most of the industry relies on short-term insurance contracts. The standards will dictate a conservative rate that insurers must use to assess their long-term obligations. Insurers will have to evaluate them based on their current fair market value.

In addition, the new standard will reclassify insurance contracts. Some products that were once considered insurance will be re-categorized as investment or service contracts. Insurers are concerned that they will even have to separate the investment component from the cost of insurance in universal life, in their financial statements.

As meetings are held all over the world, the list of irritants continues to grow. The Canadian insurance industry is up in arms. It touts the merits of its own actuarial methods. Canada, however, remains a drop in the bucket in the global economy. It must rely on large partners for support, such as the Financial Accounting Standards Board (FASB) in the United States.

In the last few years the U.S. organization has managed to slow down the International Accounting Standards Board (IASB) steamroller. Located in London, England the IASB has initiated reforms for corporate accounting around the world. Canada agreed to the International Financial Reporting Standards (IFRS), but the United States did not.

Canadian businesses have been using the new financial reporting standards since 2011. Russia has just signed an agreement to introduce them into its own laws. The U.S. is reluctant. At the G20 summit in Singapore in January, the Securities Exchange Commission promised that it would join in during the first months of the year. But as this magazine was going to print, nothing of the kind had been announced.

Despite the wait, the IASB is pleased to have brought more than 100 countries on board. Its mission is to make companies’ financial statements more transparent. The goal is a noble one, but insurers are worried about the second phase of the project. In the second quarter, the IASB plans to propose a near-final standard of IFRS 4 that will deal with insurance contracts.

Serious reservations
However, the FASB has serious reservations about it. In a meeting with its EU counterpart in 2010, the FASB forced IFRS 4 back to the drawing board. Last October, the two organizations negotiated on the basis of a new project. Several issues remain unresolved. Other meetings were held in January but did not lead to a conclusion. The IASB will present an update on its project at a summit in Kuala Lumpur on March 28.

Among the various subjects discussed in recent months, the IASB supports the idea of an explicit adjustment of margins depending on risk. In insurance, the margin is used to absorb unfavorable spreads between the results that are expected and the results that are actually obtained.

FASB would rather have a “composite” margin rather than an amortization schedule that is yet to be determined. It does not, however, support the IASB recommendation that the composite margin be revised when there is a change in a company’s cash flow.

Furthermore, the IASB would include all direct costs of acquisition in the results of a holding company while the FASB would exclude unsuccessful sales results. The discussions foundered on several other points.

Canada makes inroads
The lobby group made up of Canadian insurers has made inroads. The industry was concerned that the IFRS 4 project would make a clean sweep of its actuarial methods. Among the most vocal critics of the proposed IFRS 4 in 2010 is Yvon Charest, the CEO of Industrial Alliance.

“On a scale of 1 to 10, 10 indicating serious problems, we were at eight or nine in October of 2010. The four major Canadian life insurance companies have made submissions, and now, all the negative scenarios have been discarded. We are therefore at a 5 out of 10. This is an improvement,” commented Mr. Charest at the Scotia Capital Financials Summit held in Toronto a few months ago.

Elements of the Canadian method of measuring liabilities might even end up in future standards, says Mr. Charest, albeit with some exceptions. “Even if they are considered sound practices, the IASB may find it too difficult to integrate them,” he said.

According to a recent bulletin published by the accounting firm PricewaterhouseCoopers (PwC), a domino effect is playing havoc with deadlines. The postponement of the IFRS 9 report on financial instruments to Jan. 1, 2015 has ended up delaying all the insurance contract standards. IFRS 9 is another standard for which the adoption date keeps being pushed back. In 2009, the IASB expected to adopt it towards the end of 2010.