Iain Martin looks at what the new accounting rules mean for insurers
Insurers face years of regulatory interference with the adoption of one set of international accounting standards, including the creation of one set of rules devoted to accounting for insurance contracts.
This could confuse investors who may be misled as to a company's financial health, and subsequently drive down share prices.
Deloitte partner Andrew Downes says that differences in insurance accounting around the world "make it difficult for users of financial statements to compare and understand results of insurance businesses".
The regulatory body tasked with establishing the global rules, the International Accounting Standards Board (IASB), introduced the first set of rules last month for Europe.
The new rules dramatically change reported results for companies. They are forced to account for assets and liabilities - however long-term these assets or liabilities might be - at their market value each year, with profits hit by subsequent revaluation gains or losses.
For instance, under the new rules, the bull market in equities over much of the 1990s would have seen company accounts benefit from valuation gains through blossoming final salary pension fund surpluses.
And company results have been hit by the dramatic collapse in pension fund valuations over the last four years on falling equity prices and growing pension fund liabilities.
These distortions create unfair 'noise' in company accounts as they reflect short-term movements in items which will not materialise for 30 or 40 years.
While insurance contracts will not be included in these new rules - as there is a separate ongoing project to deal with this - many items on insurance companies' books such as pension funds and investments will be.
European insurance companies have lobbied furiously over the last two years to try to stop proposals to value insurance contracts and financial instruments (such as derivatives) at fair value.
In June 2003, the world's largest insurer, AIG, spearheaded a campaign from insurance companies against the IASB's fair value accounting rules. The insurers fear the new rules will dramatically increase earnings volatility.
To ease the switch to new insurance accounting rules, the IASB adopted a two-phase approach. Phase one is a holding standard designed to establish ground rules and bring international practices together for issued insurance contracts, reinsurance contracts and some financial instruments.
Accounting model
The International Financial Reporting Standard 4 Insurance Contracts became effective in January.
KPMG financial services advisory principal Danny Clark says the first public meeting of the working group would review the non-life insurance accounting model.
"The working group will examine responses from the insurance industry to a questionnaire put out in September as well as considering regulatory failures in the sector - such as HIH Insurance and Independent Insurance - and reasons for the failures," he says.
Clark says that the move to fair value accounting in other areas from 2005, notably the annual valuation of defined benefit occupational pension scheme assets and liabilities, would have a significant impact on insurers' results, like other companies in the financial sector.
Clark adds: "The emergence of final rules from phase two in 2007 or 2008 creates more breathing space for insurers to bed down the other fair value changes, especially pensions."
Insurers face a period of uncertainty and radical changes to the way they account for their business and risk management procedures. This period will last at least three years until the final accounting rules on insurance contracts and derivatives are agreed.
Before then, reported results will change considerably, however the underlying insurance business is performing.
Whatever else, it is clear that a little more explanation is called for. IT
The move to one standard
1997 - Former international accounting standard-setting body sets up steering committee to investigate insurance accounting
Dec 1999 - Steering committee publishes issues paper from which a draft statement of principles is developed
April 2001 - International Accounting Standards Board replaces predecessor body
Nov 2001 - IASB starts discussing draft principles and launches field tests
May 2002 - IASB splits insurance project into two phases
Nov 2003 - IASB aims to start phase two in May 2004 and complete an exposure draft by June 2005
Feb 2004 - IASB invites insurers to consultation group on international accounting standards
Mar 2004 - IASB issues IFRS4 Insurance Contracts as completes phase one and calls for a working group to be established for phase two
Sep 2004 - IASB announces 19 initial members of insurance working group with nine CFOs from insurance groups, four senior managers from insurers, two accountants from 'big four' accounting firms, three securities analysts and an actuary
Nov/Dec 2004 - Insurance working group holds first public meeting
Key aspects of IFRS4
Under IFRS4 rules:
