CFOs and senior finance officials from leading global insurance companies believe Phase II is more than an accounting issue and may impact their overall business.
The planned new insurance contracts standards known as “Phase II” are viewed by CFOs and senior finance officials as a business issue, rather than simply an accounting or regulatory issue, according a report from KPMG International.
Following discussions with some of the leading global insurance companies, KPMG recently released a report entitled The New World for Insurance – Business perspectives on Phase II, that found the proposed Phase II changes are causing some insurance companies to contemplate product offering changes, revisit sales compensation arrangements and reinsurance; training and reporting adjustments may be required to familiarize their organizations with different metrics that may be used to analyze their results.
The planned new insurance contracts standard is a response to calls for greater global harmonization of accounting rules for insurance companies. Phase II, which is the latest International Accounting Standards Board (IASB) exposure draft and Financial Accounting Standards Board (FASB) discussion paper were the products of joint deliberations by the Boards.
Phase II may result in a financial statement performance presentation based on margins rather than the traditional volume measures. Many interviewees in the KPMG report expect insurers to provide additional non-GAAP disclosures to accompany financial statements if the final performance presentation is based on the proposed summarized margin approach.
All insurers are likely to be impacted, whether they are transitioning to IFRS for the first time, moving to a new IFRS insurance standard or potentially adopting a revised US GAAP insurance model.
Pressure on resources
The technology implications of the new standards are likely to be complex and costly, as Gary Reader, Global Insurance Advisory Sector Leader explains: “Many insurers don’t have the system capabilities to capture all of the information that may be required under Phase II. There will also be significant demands on skilled actuarial and finance resources and companies may have to hire additional resources, outsource to third parties and train and redeploy skilled resources.”
Insurance companies are also all too aware of the need to educate analysts and shareholders, who may require a lengthy period of familiarization, to help them understand how and why the accounting and presentation changes will affect reported results.
The challenge, as Reader concludes, is to unite all the strands into a common program: “There are real benefits in adopting a structured approach, starting by identifying the differences between an organization’s current reporting framework and Phase II. This will help insurers include all linkages and dependencies between accounting and reporting, systems and processes, people and the business.”
Adrian Quinton, Partner, Head of Insurance, KPMG in Russia and CIS, said: “All insurance groups in Russia will be required to prepare IFRS reporting in light of the recently adopted law on consolidated financial statements. While the final date of implementation has not been officially announced yet there are reasonable expectations that this will be as soon as 2012 or 2013 for those insurers that prepare consolidated accounts. Phase 2 is set to become effective 1 January 2014. This means that the Russian insurance industry will almost simultaneously absorb both strands of financial reporting reform. The changes present a fundamental review of financial reporting of insurers in Russia”.
“Relative to the more mature markets Phase 2 will be of an added challenge for Russian insurers because of the comparatively poor quality of financial reporting and systems across the industry. Despite the challenges we feel that Phase 2 could not have come at a better time as it will really compel businesses to seriously upgrade operational capabilities and expertise which is something the industry requires to become more competitive and efficient.
Moreover, we expect that the insurance supervisory authority will consider principles of Phase 2 for the purpose of bettering regulation and moving towards a risk-based regime and the customer will be the ultimate beneficiary of this”, - Adrian added.
Note to Editors:The KPMG report The New World for Insurance – Business perspectives on Phase II was released in March 2011. The report draws on structured discussions KPMG had with a number of CFOs and senior financial officials from key global insurance companies from between September through January 2011. More information on the report can be found at www.kpmg.ru.
About “Phase II”The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have been working jointly on a new insurance contracts standard. On 30 July 2010, the IASB released its Exposure Draft 2010/8 Insurance Contracts (the ‘ED’). The FASB issued a separate discussion paper (the ‘Discussion Paper’) on 17 September 2010, containing their preliminary views – similar in nature but differing from the ED in certain aspects of aspects of scope and the measurement model. The ED and Discussion Paper are referred to collectively as ‘Phase II.’ The IASB is targeting issue of a final standard in June 2011. Details on the insurance project and timeline can be found at www.ifrs.org.
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