Ernst & Young believes the global insurance industry could capitalize on its successful introduction of International Financial Reporting Standards (IFRS) by standardizing presentation and disclosure to improve the value of financial reporting.
"Insurance companies have clearly made a big investment to comply with IFRS standards. Yet, due to complexity and scope of the reports, it is still difficult to understand relative performance," said James Dean, IFRS practice leader for Ernst & Young’s Global Insurance Center. "Now is the time for the industry to explain why certain accounting formats are more useful for shareholders and analysts and demonstrate their support for greater comparability and consistency in recognition and measurement practices."
According to Ernst & Young’s report "IFRS Insurance Reporting: Beyond Transition" areas where insurers need to provide more information include: the assumptions used to generate the amounts presented, the sensitivity of reported amounts to changes in those assumptions, and the extent to which actual experience differs from expectations and why.
In 2003 the International Accounting Standards Board (IASB) issued an interim reporting standard for insurers, which is likely to be in place until 2010 when the IASB revises Phase II of the insurance reporting plan. This creates a window of opportunity for the industry to improve and standardize company balance sheets, income statements and related notes and to provide an explanation of why certain presentation formats are more useful than others.
In its report, Ernst & Young suggests that the insurance industry make greater use of economic information (such as embedded value) in presenting financial statement disclosures and that it work on building consensus around improving disclosures in three key areas.
1. Insurance risk disclosures: The main disclosures in this area are insurance sensitivity analyses and the maturities of assets and liabilities. Ernst & Young suggests that sensitivity disclosures vital to insurance be combined and presented together so that the effects of changes in assumptions on liabilities, equity and income are more transparent. The report also proposes that insurers provide consistent analyses of both asset and liability maturities.
2. Liability roll-forward schedules: Roll-forward schedules of insurance liabilities provide a key source of information about the factors influencing the measurement of an insurer's obligations to policyholders. Since the measurement of these liabilities involves significant estimation and uncertainty, as well as a variety of different measurement bases, users should be given more information about the sources of, or causes for, changes during the period. A more structured approach to the presentation of liability roll-forward schedules — explaining the elements of movements in liabilities due to cash flows, experience adjustments and changes in assumptions — may be especially useful.
3. Claims development tables: These tables provide information about variances between management's previous estimates of insurance liabilities and the final cost of settling claims. This provides an indication of the reliability of current estimates. Companies should provide more narrative discussion to explain the amounts presented in their claims development tables. Separate tables for long- and short-tail business would also be of benefit to users of financial statements.
"More consistent disclosures will result in greater transparency and allow shareholders to better understand companies and the insurance market itself. In addition, consistent disclosures could be beneficial to the insurance companies themselves," said Dean.
The implementation of IFRS brought to light the inconsistency and complexity inherent in the insurance accounting models that currently exist. The suggestions in "IFRS Insurance Reporting: Beyond Transition" are designed to strike the right balance between detail and clarity to enhance overall investor understanding and confidence.