The International Accounting Standards Board’s
(IASB) draft IFRS for insurance contracts will result in one of the
biggest challenges to hit the insurance industry in years,
according to PricewaterhouseCoopers (PwC) global insurance leader
David Law.

The revised IFRS 4 Insurance Contracts will
fill a significant gap in international accounting.

The existing IFRS 4, released in 2004, is an
interim standard and allows many local GAAP practices to be
retained. This has led to divergent reporting practices around the
world.

Law said the impact of the new standard will
be felt across the sector and will require insurers to completely
overhaul their systems and performance reporting.

“Nevertheless, insurers should welcome the
exposure draft as a significant step forward to achieving a global
comprehensive and comparable accounting model,” Law added.

E&Y global IFRS insurance leader James
Dean said the consistent financial reporting structure for the
industry has to be welcomed.

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“Without doubt, IFRS 4 will create a level
playing field for the insurance industry, providing all financial
statement users and preparers – from policyholders to investors to
analysts, competitors and regulators – with greater comparability
and transparency about performance as a direct result of consistent
measurement and presentation models brought by the standard,” Dean
said.   

Divided responses

PwC partner Gail Tucker predicted the industry
reaction to the proposals will be divided.

“[The proposals] will create increased
volatility in insurer’s reported results going forward, as market
movements will now affect reported profit,” she said.

“There will also be significant changes to the
presentation of the income statement, which stakeholders will need
to take the time to understand.

“[The] developments will also cast their net
wider than the insurance industry, affecting all companies that
issue contracts with insurance risk, such as financial guarantee
contracts.”

KPMG UK head of insurance accounting Danny
Clark said aspects of the proposed insurance model that are likely
to attract debate include determining a discount rate for
obligations based on their characteristics as opposed to the return
on invested assets, and the treatment of changes in assumptions
driving the measurement of the insurance obligation. 

“The effects of changes in assumptions,
whether financial such as interest rates or non-financial such as
mortality and morbidity rates, would be required to be recognised
in the statement of financial position and the statement of
comprehensive income each reporting period,” Clark said.

Deloitte global IFRS leader Joel Osnoss said
the IASB has been working closely with the US Financial Accounting
Standards Board (FASB) in developing the new IFRS.

“We understand that the FASB may publish its
new proposals for insurance accounting in late August, meaning
there is a prospect of truly global convergence in accounting for
insurance contracts,” Osnoss said.

The Insurance Contracts is exposure draft open
for comment until 30 November 2010.