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First Mr. Hoogervorst talked about the role of accounting standards in fostering financial stability. This issue was directly connected to his second topic—IFRS 17, IASB´s recently issued Standard on insurance contracts. He devoted the last part of his speech to his current work stream, Better Communication in Financial Reporting, which aims to improve the communication effectiveness of financial reports.
IFRS 17 is the last of the so-called big four—revenue recognition, financial instruments, leases and now insurance. The IASB and its predecessor body, the IASC, worked on this Standard for no less than 20 years, but I believe it was entirely worth the wait.
With over $13 trillion in assets, the insurance industry is obviously a hugely important component of the global economy. It is, therefore, unsatisfactory that until last month we did not have a truly international standard for insurance accounting. The current standard, IFRS 4, is no more than an interim measure. In essence, it allows insurance companies to continue to use existing national standards. Many of these standards have not been modernised over the years and they differ greatly from each other.
IFRS 4 truly allows a mixed bag of national standards to be applied to insurance. The top 20 listed insurance companies use a variety of national generally accepted accounting principles (GAAPs). Quite a few multinational insurance companies even consolidate their results using different national GAAPs within their financial statements! The differences among these national standards are enormous.
For the measurement of long-term liabilities it matters greatly which discount rate is used. Among the 100 biggest insurers, 35% still use historical rates, 43% use current rates and 22% use a mixture of rates.
Many national GAAPs result in historical cost information that may have little relevance. Discounting an insurance liability using an interest rate of 20 years ago, when the interest rate environment was completely different, does not provide relevant information. Also, historical cost does not give proper information on the costs of options and guarantees that are often embedded in life insurance contracts. Those costs are often recognised very late or only when they are due. As a result, the accounting often provides inadequate information about the risks to which an insurer is exposed.