The IASB Discussion Paper on Insurance: A CFO Forum Perspective*
Jacques Le Douit
The IASB has issued a Discussion Paper on accounting for insurance and reinsurance contracts. This project is based on a prospective measurement of the insurance liabilities, the current exit value, which corresponds to a “market consistent” transfer value of insurance contracts to another market participant. This project is similar to the Elaborated Principles (the EPs) proposed by the CFO Forum in June 2006: a single model for measuring the insurance liabilities based on a three building blocks approach: expected future cash flows, discounted at risk-free rate, plus a margin for risk and uncertainties. However, there are key major differences between the two. Those differences concern several areas: future cash flows (only cash flows which are legally or contractually enforceable would be recognized), “market consistent” approach (in particular estimation of expenses should be based on a theoretical level of efficiency rather than on the own costs of the insurer), service margin (according to the IASB, to be transferred to another market participant), and upfront profit recognition of initial margins (rather than over time as for other long-term services). The European insurers disagree with the IASB view that such service margin concept is relevant. They also disagree that the retail market and the wholesale market for insurance would be the same. They think there is a significant difference between entry and exit prices, that is, a significant initial profit. The insurers are concerned by the consequences of those proposals, which would lead to a non-economic valuation of the insurance liabilities and a flawed pattern of profit recognition. Since the measurement of assets and liabilities in Solvency II project should be based on IFRS, the IASB accounting for insurance project could jeopardize Solvency II, which is currently based on an economic balance sheet approach. The CFO Forum has been supporting a market consistent measurement of liabilities for accounting purposes that is the same as proposed under Solvency II. The CFO Forum is considering alternatives for recognition of profit over the time of contracts when the risk is released and the services rendered to policyholders; these alternatives should be consistent with recognition of the initial profit margin as available capital for solvency requirements. The Geneva Papers (2008) 33, 41–53. doi:10.1057/palgrave.gpp.2510163
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