Moore Stephens: Insurance Industry Must Prepare for IASs

Accountant and consultant Moore Stephens has warned that the introduction of International Accounting Standards (IASs) covering financial reporting for publicly traded companies in the EU will mean that the insurance industry will have to develop a much sharper focus on actuarial processes and claims run-off projections. The IASs are due to be introduced in the EU during 2005. Michael Butler, a partner with the Moore Stephens Insurance Industry Group, writing in the firm's insured interest newsletter, says, "For the insurance industry, the introduction of IASs is likely to be doubly complex as it is planned to coincide with the new IAS on accounting for insurance contracts which has been gestating since 1997. " The introduction of new Market Valuation Margins (MVMs) may be the biggest potential source of problems for non-life insurers. MVMs are designed to provide a buffer against uncertainties, primarily in relation to forecasting outstanding claims liabilities and settlement patterns. But there are no firm guidelines from the International Accounting Standards Board on how MVMs are to be calculated. Moore Stephens notes, "It is fair to say that finding the right basis for MVMs will vary in accordance with the individual characteristics of different classes of insurance. Among the factors that insurers will have to take into account are the volatility of reserves, the length of the liability tail, and the ratio of earned-to-unearned cashflow." Michael Butler says it seems likely that fair-value accounting principles will be adopted for the IASs, and that this could involve major changes for some non-life insurers. He adds, "The draft IAS envisages all prospective cashflow, including estimates of unpaid claims on a discounted basis, being recorded and recognized at the time a contract is written. This will involve a move away from the traditional accident-year basis of accounting for non-life insurers to an underwriting-year basis, with recognition of underwriting results from the year of contract inception. "The recognition of profit will be advanced, and there is likely to be more volatility in income statements, especially for long-tail liability business. It will also mean that there will be no unearned premium reserves or deferred acquisition costs, and deferred or fund bases of accounting will not be permitted." A number of other issues arise out of the draft IAS, not least the fact that 'financial risk' is likely to be excluded from insurance contract definitions, which means that many existing Alternative Risk Transfer products will need to be re-examined. Moore Stephens concludes that the insurance industry will need still greater recourse to technology and sophisticated accounting and actuarial techniques if it is to position itself advantageously within the terms of the proposed accounting standards.