Major changes ahead for insurance accounting, says KPMG

TORONTO, July 30, 2010 – KPMG welcomes today’s release of proposals by the International Accounting Standards Board (IASB) for a new accounting model for insurance contracts. Arriving at common requirements is likely to have a significant impact on the insurance industry, considering the current diversity under IFRS in accounting practices in different geographies.

Insurers will need to get to grips with these proposals as they represent some far-reaching changes, according to KPMG. They come at a time when there are already significant proposed changes on how financial organisations of all kinds measure their financial instruments.

The IASB has proposed a fulfilment-based measurement model for insurance contracts. Commenting on the development, Joachim K�lschbach, KPMG’s global IFRS insurance standards leader and partner in the German firm, said: “The IASB is proposing to base measurement of rights and obligations under an insurance contract on an amount an insurer is obliged to pay through the life of the contract rather than a model based on an “exit value” as if transferring the contract to a market participant. This reflects the difficulty in developing market-based assumptions in measurement when there is not an active market for insurance contracts. Furthermore, in the proposed insurance model, gains would not be recognized when an insurance contract is secured but rather as the services are provided. Both of these elements are likely to be viewed as increasing the relevance of financial statements over the ‘exit value’ model in an earlier Discussion Paper since they are aligned with the business model of insurers, which include long-term servicing of insurance contracts as opposed to contract trading for short-term gain.”

Aspects of the proposed insurance model which are likely to attract debate include determining a discount rate for obligations based on their characteristics as opposed to the return on invested assets, and the treatment of changes in assumptions driving the measurement of the insurance obligation. The effects of changes in assumptions, whether financial such as interest rates or non-financial such as mortality and morbidity rates, would be required to be recognised in the statement of financial position and the statement of comprehensive income each reporting period.

Joachim K�lschbach commented: “We expect that in order to achieve as much accounting consistency as possible in recording changes in liabilities and assets, many insurers would likely apply IFRS 9 Financial Instruments in such a way that an insurer’s assets that support insurance obligations are measured at fair value with changes recognized in the statement of comprehensive income. However, the differences between the proposed measurement approaches for insurance obligations and for those invested assets that are required to be measured at fair value would affect the measurement of profit or loss and equity, and may result in increased volatility in the statement of comprehensive income and the statement of changes in equity of many insurers.”

“Immediate recognition in the statement of comprehensive income of all changes in the measurement of an entity’s rights and obligations under an insurance contract is different from the proposals contained in the recently-published Exposure Draft on revenue recognition, under which changes in such estimates would affect revenue or costs immediately only to the extent that they relate to performance obligations that have already been fulfilled or that are onerous. The impact of these requirements may go beyond financial reporting and affect an insurer’s products and asset allocation.”

Neil Parkinson, KPMG’s Insurance Sector Leader for Canada, emphasized the implications for Canadian insurers: “The IASB’s proposals would affect how all insurers measure their profitability and their financial position, and would likely result in greater volatility in many of the key measures they report. This volatility would be magnified for longer term insurance products, and is of particular concern for Canadian life insurers.”

Mr. K�lschbach also noted: “Another area which is likely to draw significant comment is the presentation of the statement of comprehensive income. Although the IASB has proposed a presentation for the statement of comprehensive income which follows the new measurement model, this presentation focuses on net margins rather than reporting revenues and expenses of an insurance contract. As a result, there may be a loss of information needed for financial statement users to analyse an insurer’s business.”

Commenting on the proposals, Frank Ellenbuerger, KPMG’s global insurance sector leader and partner in the German firm, said: “In Europe, the development of a comprehensive IFRS for insurance contracts should be considered in conjunction with the Solvency II regime addressing capital adequacy requirements. The recognition and measurement of assets and liabilities under Solvency II follow, to a large extent, similar techniques to the insurance proposals, which may allow companies to combine financial and regulatory reporting processes. However, there are differences in the detail. We believe it would be preferable if these differences could be limited to isolated issues and situations, where the requirements of Solvency II and the insurance proposals have different objectives. Clear objectives should allow reconciliation between the reporting frameworks to avoid confusion on what is the financial position of an insurer.”

Mr. Ellenbuerger continued: “Given the significance of the proposals to an insurer’s financial statements and the challenges that can be expected in implementing them around the world, particularly to insurers writing long-term products as well as insurers operating globally and in emerging markets, we support the Board’s further consideration of an appropriate effective date.”

Gary Reader, KPMG’s Global Insurance Advisory Leader based in the US firm, added: “There is undoubtedly a significant amount of technical information to digest, but as insurers work through the detail they should begin to identify the systems, data and process areas impacted by this proposed accounting change together with the likely broader business and people impacts to derive a plan to address these matters in a way that meets likely adoption timelines.”

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KPMG LLP, the audit, tax and advisory firm (, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.

About KPMG International

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 145 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.