Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), has indicated it intends to publish the long-awaited insurance standard early next year, branding the current lack of comparability and the often poor quality of existing accounting practices in the insurance industry around the world as ‘unacceptable’
In a speech given in Berlin, Hoogervorst reiterated that the current IFRS 4 is a holding standard which has grandfathered what he called ‘an array of highly diverse national accounting standards’. As a result, there is little comparability between insurance companies around the world, or between insurance and other parts of the financial industry, such as banks.
Hoogervorst said: ‘We have been working on the new insurance contracts standard for many years and its publication will not come a day too soon.
Under existing accounting for insurance contracts, Hoogervorst noted, variations often occur in revenue recognition—some insurers may recognise all deposits received as revenue, which would never be the case with a bank or asset management company.
The measurement of insurance liability also varies—at the moment, insurers may use discount rates based on the expected return of assets, or risk-free discount rates, or even historical interest rates.
Hoogervorst said: ‘As a result, the devastating impact of the current low-interest-rate environment on long-term obligations is not nearly as visible in the insurance industry as it is in the defined benefit pension schemes of many companies. Clearly, discounting an insurance liability that was incurred 15 years ago at a historical interest rate of 5%-6% does not give relevant information in a time when interest rates are close to–or even below–zero.’
He was also critical of the way in which insurance companies presented other key details, stating: ‘In some cases, minimum-return guarantees and other complex features are typically reflected in the insurance liability only when they become worth exercising and even then typically only at an amount that does not reflect their true economic value. For a bank, such treatment of complex financial liabilities would be unthinkable.’
Hoogervorst told his audience that the IASB had finished its deliberations recently and staff are ‘very busy’ drafting the standard, which he expected to be issued in ‘early 2017.
‘Everybody agrees it is urgent that we fix this as soon as possible. That is why the IASB is determined to publish the standard as soon as we can,’ he said.
Hoogervorst’s speech is here.
