The introduction of an International Financial Reporting Standard (“IFRS) for all insurers has been proposed by the International Accounting Standards Board (the “IASB”) in its exposure draft on improvements to insurance accounting practices published on 30 July 2010. 

This draft is the culmination of work undertaken since the publication of a discussion paper on the topic in 2007. The current standard of financial accounting, introduced in 2004, permits the retention of varying international accounting practices with the result that financial information is not readily comparable across different jurisdictions. According to the IASB Chairman “he proposed standard better reflects the economics of insurance contracts and would result in more relevant, understandable and comparable information being available to investors”.

The proposed standard aims to:

• provide a comprehensive framework requiring insurers to provide relevant information for financial statements which may be used for economic decision-making;
• eliminate inconsistencies and weaknesses in existing practices by replacing IFRS 4 Insurance Contracts, which is an interim standard; and
• provide comparability across entities, jurisdictions and capital markets.

A comprehensive measurement approach using certain “building blocks” is proposed.  Those building blocks include:

• a current estimate of future cash flows;
• a discount rate that adjusts those cash flows for the time value of money;
• an explicit risk adjustment; and
• a residual margin.

A modified version of the measurement approach will be used on contracts of short duration whereby:

• during the coverage period the insurer will use an allocation of the premium received, similar to much existing practice; and
• for events which have already occurred, the new “building block” approach would be used.

These standards will greatly impact on how (re)insurance companies measure, report and evaluate their contracts and may result in modifications to information systems, risk management programmes and product design.

Comments are invited on the exposure draft and any comments should be submitted on www.ifrs.org by 30 November 2010.

For further information, please contact Eoin Caulfield.