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New accounting proposals ‘would result in new world for insurance’

New accounting proposals will result in “a new world for insurance”, says KPMG in Bermuda.

The firm said in a statement KPMG welcomes revised insurance accounting proposals, published today by the IASB, marking a major step towards modernising and harmonising insurance accounting.

Tom Kelly, managing director at KPMG in Bermuda explained: “For insurance and reinsurance entities based in Bermuda, the impact will vary greatly depending on line of business and global spread.

“Bermuda’s SEC registrants will also be keeping a keen eye on where the FASB will end up with their insurance contract project and what differences will remain upon finalisation of both. With this release the insurance industry is one step closer to the long anticipated overall on insurance accounting.”

KPMG said the IASB has made great efforts to improve the proposals by addressing the key concerns of constituents while retaining the objective of a current value basis for measuring insurance contract liabilities — bringing a final IFRS for insurance a great deal closer: “However, with the debate surrounding the insurance project running for more than 15 years, it is clear that there is not a single model that will please everyone.”

Richard Lightowler, head of insurance for KPMG in Bermuda, commented: “The proposals and their application are likely to be complex. This is the last chance for insurers and users to influence the outcome of the project.

“Given the current diversity in practice, KPMG considers it essential that the IASB finalises its insurance standard. The IASB’s proposals would affect the way in which insurers report their profitability and financial position and would likely result in an overall increase in volatility in profit or loss and equity for most insurers as a result of having to continually remeasure insurance contract liabilities at a current value, rather than on an historical cost basis.”

Some of the remeasurement will be through other comprehensive income (OCI) and the extent to which this mitigates volatility in profit or loss and equity would be highly influenced by whether financial assets which are linked to the insurance contract liability under proposed revisions to IFRS 9 Financial Instruments are measured at fair value through OCI, fair value through profit or loss or amortised cost, KPMG said.

The need to consider the implications for asset-liability management would be accelerated, as the requirements of IFRS 9 are currently expected to come into effect before the insurance proposals.

In addition, those insurers writing long-term life business with options and guarantees may need to report changes in these items’ value in the income statement. As a result, there may be debate as to whether other changes in the insurance liability should also be presented in OCI and about the residual volatility expected in both earnings and equity.

Gary Reader, KPMG’s global insurance advisory leader said: “The level of change and the complexities associated with implementing these proposals should not be underestimated. Insurers would be likely to feel the consequences throughout their organisations. The devil is in the detail and the scale of change would depend on the accounting bases that insurers use today.”

KPMG said the proposals would be likely to result in greater emphasis on the entire statement of profit or loss and OCI rather than just profit or loss. These changes to the accounting and financial reporting requirements would need to be explained to analysts, investors and other stakeholders.

“Insurers may have to contemplate major changes to data and systems, education and communication to stakeholders and changes to asset-liability management,” KPMG said.

“Profit profiles and product offerings may be impacted and insurers would need to ramp up resourcing in the finance and actuarial functions. However, some insurers would be able to reuse and repurpose current efforts to implement accounting change for financial assets and for regulatory purposes. “

KPMG said the re-exposure also introduces a new presentation approach for both the statement of profit or loss and OCI and statement of financial position, which would dramatically change the way insurers — especially life insurers — report performance. Insurance contract revenue would be allocated over the coverage period in proportion to the value of the services provided in each period, which would be completely different to the premium figures presented today.

The Bermuda Monetary Authority will also be looking forward to the completion of these projects as it will assist in the introduction of an Economic Balance Sheet regime that dovetails with the new standards.

Mr Kelly summarised: “Over the recent number of years insurers have been modernisation their systems with some broad considerations of what the insurance accounting standards would require in the future. With the finalisation of these proposals, opportunities for synergies in areas such as data collection, modelling capability and investment in systems and resources can be more fully realised. The bottom line is that the technical aspects of the proposals can be made operational.”

The comment period for the proposals expires on October 25, 2013.

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Published June 20, 2013 at 1:50 pm (Updated June 20, 2013 at 1:50 pm)

New accounting proposals ‘would result in new world for insurance’

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