When the International Accounting Standards Board (IASB) was created 11 years ago, it inherited a fairly developed project on a new accounting standard for insurance contracts that its predecessor had started in 1997. Insurance companies have been waiting since then for a single global accounting standard that fits their uniquely complex industry. Over the next 12 months they might finally get it. Accounting rule-makers at an international level are close to agreeing on a new reporting framework for insurers. But even at this stage the industry could find itself left with new International Financial Reporting Standards (IFRS) that do not align with U.S. accounting standards.
The industry is not celebrating yet. There are still technical issues to resolve, stemming from some key differences the rule-makers on either side of the Atlantic have so far failed to reconcile. Given the public interest surrounding rules for the insurance sector’s profit reporting, reaching international agreement is not easy, and this project has had many dead ends and false dawns. The finishing line may be in sight, but nobody is sprinting to be first across it.
Indeed, considering the magnitude of accounting change that is likely to be required, many companies are doing little to prepare. Is this a mistake? Or, given the uncertainty over what form the final standards will take, is a more cautious approach justified? What steps could insurers take now that would help them benefit from the transition, regardless of how and when the timing and technical aspects of the rules are finally resolved?
In April and May 2012 the Economist Intelligence Unit, on behalf of Deloitte, surveyed over 200 senior executives at insurance companies from across the globe to ascertain their views on the impact of the likely accounting changes on their business, and what – if anything – they are doing to prepare. This report presents the highlights of the survey findings, along with additional insights from senior executives.
Key findings from the research include:
The big problem is uncertainty. The proposed accounting changes in IFRS 9 and IFRS 4 Phase II#Footnote">[1] and the corresponding proposals in the United States are highly complex, and implementing them will require considerable time and expense. But insurers’ main concern is the uncertainty as to when they will have to adopt them – according to 52 percent of survey respondents, this is a worry. Senior executives fear that a confusing transition will put off investors and potentially damage the sector’s market valuation and investor appeal further.
Insurers fear political meddling. Both standards have been beset by delays, and insurers fear this could happen again. This is particularly the case in North America, where 42 percent of insurance companies worry that political considerations could interfere with the standard-setting process.
Insurers want a global framework. Overwhelmingly, insurance companies want to be able to use one set of global accounting standards. Almost one-half of respondents (47 percent) want the U.S. to abandon its national accounting standards in favour of IFRS. If that does not happen, they would accept a compromise, whereby the two accounting regimes are aligned, so long as the core principles remain intact. But their priority is to get the technicalities and timeline resolved, so that they can start work on implementation.
Companies are stuck in a "wait-and-see" mode. Preparations for the new standard are low at many companies. One-half of those who rate the insurance contracts standard as high-impact have not even conducted a business impact assessment. Nearly one-quarter (24 percent) of the largest companies have not allocated a budget to the transition.
Boards have little awareness of changes. It may be too early to give the board a view on how the company’s financial statements will change, but the survey finds that many are not even being kept up to date with the progress that standard-setters have made and when implementation might begin. Executives at two-fifths of insurance companies say their board has no awareness of or involvement in these accounting changes.
Investor engagement has yet to start. A big fear among insurance executives is that the transition to new accounting rules will confuse investors. Yet few of them have been talking to investors about this issue. It may be too early for a detailed shareholder engagement drive, but insurers could talk to analysts about the possibilities and the potential impact under different scenarios. Just 11 percent of western European companies and virtually none in the U.S. (2 percent) have started an investor engagement programme.
Insurers doubt the benefits. With the exact nature and timing of the required changes uncertain, companies are finding it hard to work out whether the benefits will justify the costs. So far, about one-fifth (21 percent) think the insurance contracts changes will not be worthwhile. The picture is worse for the financial instruments standard: 37 percent think the costs will exceed benefits. Insurers may need to think harder about how to secure value here. They have pushed long and hard for an accounting regime that meets their needs. Now they need to make sure it delivers the expected benefits.
#_ftnref1" id="Footnote" name="Footnote">[1]
IFRS 9 refers to the IASB project to introduce a new accounting standard for financial instruments. This would primarily affect the reporting of insurers’ investments and their returns. IFRS 4 Phase II refers to the IASB project to introduce a new accounting standard for insurance contracts. This would primarily affect the reporting on insurers’ income, expenses and liabilities from the insurance contracts they sell. The U.S. accounting rule-making body, the Financial Accounting Standards Board (FASB), is working on equivalent projects with the goal to bring U.S. accounting rules into line with IFRS.
