The International Accounting Standards Board (IASB) chairman Hans Hoogervorst has defended criticisms from insurers about its proposed reforms to measuring liabilities in its insurance standard, saying the changes are a "huge improvement".

The amended standard proposes insurers use current interest rates when measuring the liabilities they face from honouring policies on their books, as opposed to the current system whereby insurers use "outdated" interest rates, which in some cases date back a decade.

Hoogervorst, who made the comments at a recent event hosted by the Institute of Chartered Accountants in England and Wales and IFRS Foundation Trustees, suggested the old system was deceptive because "the fact the effects of low interest rates are slow to emerge in balance sheet terms does not mean the problem is not there and there is a real risk firms could build up hidden problems".

One problem suggested with the new standard is that it could lead to increased volatility in the market. However, Hoogervorst dismissed this argument, suggesting "where it leads to more volatility, it is probably a reflection of real economic risk".

On the possible issue of what short term volatility could have on long term investors, Hoogervorst said "even long-term investors cannot afford to ignore short term fluctuations, if only because you never know how short the short-term will be".

The IASB chairman also looked at an alternative proposal brought forward by some insurers, whereby the measurement of the insurance liability could be based on the expected return on the assets held by the insurer, describing it as "hope-and-wish-accounting".

Related article

IASB to re-expose insurance standards proposal

Related link

International Accounting Standards Board: Hans Hoogervorst full speech