15 July 2009
Published in: Accounting - tax
IASB proposals may not help insurers
Proposed changes to the reporting of the value of financial instruments run the risk of actually increasing earnings volatility for insurers, according to Andrew Cox, partner at Lane Clark & Peacock.
The International Accounting Standards Board (IASB) yesterday published proposals to improve financial instrument accounting and address how financial instruments are classified and measured.
Cox acknowledged that "it makes sense" to smooth earnings for long term-assets that will be held to maturity. But he added: "For insurers, what really matters is not so much the asset value, but the difference in value between the assets and liabilities. One of the big things coming through at the moment is that the liabilities will soon have to be measured on fair value.
"The problem is that it would actually make sense to keep the volatility in the asset values because that offsets the volatility in the liability values. So in fact if you smooth the asset values then it might make the difference between your assets and liabilities even more volatile and that's what earnings are based on. It may not actually help insurers a great deal."
Neil Cantle, principal and consulting actuary at Milliman, explained: "Insurers must now choose to allocate assets between amortized cost and fair value. The first group are those with predictable flows, which are valued using amortized cost, while the second are traded and are to be valued at market value."
Cantle said the changes -- if they go through -- are more likely to affect European insurers than those in the UK. "The biggest immediate impact of the new regime is likely to be on those who previously held assets as ‘available for sale.' Changes in value would have been taken as changes in equity, but if those assets are now classified as being fair value, the changes in value will go through the income statement."
Cox believes the proposals will still be welcomed by the insurance industry. "I think overall anything which moves away from applying fair-value accounting to absolutely everything will be welcomed because the volatility it introduces is a great concern to many companies," he observed. "However, whether this particular change is going to make a big difference, I'm not sure at the moment. But it might be the start of things being toned down a bit."
The IASB will consult on the proposals until 14 September 2009.