Insurance and International Financial Reporting Standards
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Insurance and International Financial Reporting Standards Lothar Meyer CEO, ERGO Versicherungsgruppe AG, Victoriaplatz 2, D-40198 Du¨sseldorf, Germany. E-mail: [email protected]
The development of an international standard for the accounting of insurance contracts is a challenging project. The goal of this standard is to accomplish high transparency and decision usefulness for participants in the capital markets. The paper gives an overview on the actual development status of this accounting standard for insurance contracts. Beyond a description of the actual status, possible consequences and problems for the business model of insurance companies are elaborated. Furthermore, the article gives an outlook on phase II of the insurance project and outlines the possible relationship between IFRS and the Solvency II project. The Geneva Papers (2005) 30, 114–120. doi:10.1057/palgrave.gpp.2510012 Keywords: fair value accounting; International Financial Reporting Standards; IAS 32/39; Solvency II
Introduction Group financial reporting among German insurance companies is often characterized by a ‘‘mixed accounting model’’. Although this expression describes the use of historical cost and fair value in IAS 32 and IAS 39, it also stands for the way group financial reporting of insurance companies is conducted. On the one hand, financial assets are accounted in accordance with IAS 39. On the other hand, there is no International Financial Reporting Standard (IFRS) for insurance contracts covering actuarial reserves. As best practice for missing standards on actuarial reserves, USGAAP is used as a surrogate in accordance with IAS 1 par. 22. Back in 1997, the International Accounting Standards Board (IASB) set up a project called ‘‘Insurance Contracts’’ to address this issue. Its objective was to standardize insurance-specific issues and, in particular, to enable consistency in accountancy tools for financial instruments. This objective was linked to the accounting of assets and liabilities arising from insurance contracts at fair value. It soon became apparent that fair value accounting would have significant consequences for insurance reporting, since there are no active markets for actuarial liabilities and hypothetical market values can only be arbitrary. EU Commission guidelines require all EU companies using organized capital markets to prepare their accounts in accordance with IAS/IFRS from 2005 on. The project is split into two phases. The first phase will come into effect in 2005 as a transitional phase until the final standardization of an individual IFRS is accomplished. To this end, the IASB published an exposure draft in July 2003, which allows companies to maintain existing national accounting practices for the most part. At the same time, the IASB, which has positioned itself as an important globally acting
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institution, is determined to pursue a full fair value concept in phase II, which will be driven by academic excellence. However, it remains to be seen whet
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