IAS and Insurance: Ahead of the Curve
The International Accounting Standards Board (IASB) is considering a proposal that insurance contracts be valued using a form of fair value accounting - most likely "entity specific" fair values. The timing of the move to the new standard is uncertain and will vary from country to country.
For countries domiciled in the European Union, however, the adoption of IAS is a question of when, not if. The EU is pressing for conversion to the IASB standards by 2005 as part of its commitment to a common capital market. It remains to be seen when, or even whether, standard-setters in other countries, such as the Financial Accounting Standards Board, will follow this movement toward fair value. However, some other countries have made a commitment to follow the IASB, and momentum is gathering, even among U.S. insurers.
The IASB insurance proposals are revolutionary, and will have huge implications for companies that have no previous experience with prospective liability valuation methodologies. Accomplishing live application of the insurance standard by 2005, with comparative figures for 2004, will present a formidable, if not impossible, challenge, especially since the IASB proposals are currently far from finalized. Nevertheless, real deadlines loom. Given the immensity of the task of converting to the new valuation standard, and the very real benefits they stand to gain, insurers should begin now to plan for applying the standard.
This article, (269Kb PDF) which originally appeared in our US financial services quarterly, CrossCurrents, was written by Phil Arthur, leader of Ernst & Young Canada's insurance practice and a member of the IASB's Insurance Advisory Committee.
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