17 September 2012

FT: Insurance principles - Hurdles towards insurer harmony

The UK's Generally Accepted Accounting Principles (GAAP), which are used by private companies, are being phased out in favour of a version of the globally recognised International Financial Reporting Standards (IFRS). Listed UK companies have already switched to IFRS.

The shift may be especially troublesome for mutual and privately owned insurers because it coincides with several other distinct, but often related, regulatory and accounting changes. Notably, IFRS for insurers is itself set to change.

The UK Financial Reporting Council’s (FRC) Accounting Council has proposed that the country’s GAAP is replaced by a simplified version of IFRS from the start of 2015. Separately, however, the International Accounting Standards Board has been trying to agree on a new standard for insurance accounting with the US Financial Accounting Standards Board.

Changing capital requirements and other regulations add another layer of complexity for smaller insurers. UK GAAP is aligned with existing solvency standards, but these are being replaced by new EU-wide Solvency II capital requirements.

For its part, the IFRS insurance convergence project has been in the works for more than a decade. It remains subject to significant political wrangling, with the standard-setting bodies involved yet to reach agreement. Few consultants expect it to be introduced before 2016.

The new standards present practical challenges and strategic questions for mutual and privately owned insurers. The former set of problems range from the need to upgrade computer systems to training employees. Aside from the challenges in compliance, the accounting reforms also raise potentially more profound questions about whether a change to the basis of financial statements changes the business insurers do.

While the details of the new IFRS remain uncertain, analysts believe they are likely to result in greater transparency – for investors and policyholders. One the main goals of the new IFRS is to harmonise the inconsistent approaches across jurisdictions to measuring the value of insurance contracts. Investors have long complained that insurers’ financial statements are opaque and that their diversity makes it difficult for them to compare companies operating in different markets. This ultimately can make it harder for the sector to raise capital. However, the advantages of adopting the new IFRS are less obvious for mutual and smaller private insurers.

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