A Reliable Fair Value for Insurance Contracts
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A Reliable Fair Value for Insurance Contracts Stefan Engela¨nder and Joachim Ko¨lschbach KPMG Deutsche Treuhandgesellschaft, Barbarossaplatz 1a, 50674 Cologne, Germany. E-mail: [email protected] and [email protected]
In 1997, the IASC (predecessor of today’s International Accounting Standards Board – IASB) started a project on accounting for insurance contracts. At the end of 2001 and beginning of 2002, it published a Draft Statement of Principles (DSOP) for an International Financial Reporting Standard Insurance Contracts. This proposal was based on a fair value accounting on assets and liabilities arising from insurance contracts. Whereas a fair value is relatively easily applicable for financial instruments that are traded at active markets, the key problem for the measurement of insurance contracts is that there do not exist active markets. The proposal for a full fair value accounting for insurance entities did therefore not find a broad acceptance in the insurance industry.1 The IASB has now restarted the discussion of an International Financial Reporting Standard Insurance Contracts replacing the interim solution of IFRS 4. The Geneva Papers (2006) 31, 512–527. doi:10.1057/palgrave.gpp.2510093 Keywords: international financial reporting standards; fair value accounting; insurance contract project phase II; range approach
Introduction Since 1997, the IASB (and its predecessor, the IASC) has been closely examining the accounting for insurance contracts.2 Its target is to achieve a harmonization of the very diversified accounting approaches currently globally used in the insurance industry. The IASB is currently concentrating mainly on fair value approaches, such as current entry or exit value. In particular, profit recognition, consideration of initial cost and renewals cause significant concerns for the many interested parties (industry, accounting profession and analysts). Up to now, most features were considered separately and only in connection with very specific, mainly investment-oriented products. This article discusses a possible solution based on the IASB Framework. It proposes a more integral view of all accounting issues, especially considering the characteristics of most common insurance contracts.
Main insurance features According to IFRS 4, the defining feature of an insurance contract is the transfer of a risk specific for the policyholder. The purpose of such a transfer is the utilization of
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Dickinson (2003, p. 151); Dickinson and Liedtke (2004, p. 540). For current development, see Bloomer (2005, p. 101).
Stefan Engela¨nder and Joachim Ko¨lschbach A Reliable Fair Value for Insurance Contracts
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risk mitigation in a pool of similar but independent risks aggregated by the insurer.3 From the insurer’s viewpoint, that approach causes some specific consequences. The aggregation of very similar risks requires a very active, narrow-focused sales approach, usually with significant initial costs. A part of those costs is spent for the initial test of whether the proposed risk actua
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