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
partner with the Moore Stephens Insurance Industry Group, writing in
firm's insured interest newsletter, says, "For the insurance industry,
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
been gestating since 1997. "
The introduction of new Market Valuation Margins (MVMs) may be the
potential source of problems for non-life insurers. MVMs are designed
provide a buffer against uncertainties, primarily in relation to
outstanding claims liabilities and settlement patterns. But there are
firm guidelines from the International Accounting Standards Board on
MVMs are to be calculated.
Moore Stephens notes, "It is fair to say that finding the right basis
MVMs will vary in accordance with the individual characteristics of
different classes of insurance. Among the factors that insurers will
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
will be adopted for the IASs, and that this could involve major changes
some non-life insurers. He adds, "The draft IAS envisages all
cashflow, including estimates of unpaid claims on a discounted basis,
recorded and recognized at the time a contract is written. This will
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
volatility in income statements, especially for long-tail liability
business. It will also mean that there will be no unearned premium
or deferred acquisition costs, and deferred or fund bases of accounting
not be permitted."
A number of other issues arise out of the draft IAS, not least the fact
'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
recourse to technology and sophisticated accounting and actuarial
if it is to position itself advantageously within the terms of the