The planned new insurance contracts standards known as “Phase II” are viewed by CFOs and senior finance officials as a business issue, rather than simply an accounting or regulatory issue, according to a report from KPMG International.
Following discussions with some of the leading global insurance companies, KPMG recently released a report entitled The New World for Insurance – Business perspectives on Phase II, that found the proposed Phase II changes are causing some insurance companies to contemplate product offering changes, revisit sales compensation arrangements and reinsurance; training and reporting adjustments may be required to familiarize their organisations with different metrics that may be used to analyse their results.
“The changes could affect the perception and comparability of financial performance, both between one insurer and another and between the insurance sector and other industries. There may be major implications for how insurers manage their businesses, causing a re-think of issues as varied as product design, data requirements, systems, controls and tax,” explains Frank Ellenbüerger Global Head of Insurance for KPMG.
The planned new insurance contracts standard is a response to calls for greater global harmonization of accounting rules for insurance companies. Phase II, which is the latest International Accounting Standards Board (IASB) exposure draft and Financial Accounting Standards Board (FASB) discussion paper were the products of joint deliberations by the Boards.
Phase II may result in a financial statement performance presentation based on margins rather than the traditional volume measures. Many interviewees in the KPMG report expect insurers to provide additional non-GAAP disclosures to accompany financial statements if the final performance presentation is based on the proposed summarised margin approach.
All insurers are likely to be impacted, whether they are transitioning to IFRS for the first time, moving to a new IFRS insurance standard or potentially adopting a revised US GAAP insurance model.
“The changes need not be only a burden. They can be a catalyst to improve your finance function, systems and investor communications. But insurance companies need to start planning now to begin the transition to Phase II while the standard evolves, to make the most of potential synergies in areas such as modelling capability and investment in systems,” emphasizes Ellenbüerger.
Pressure on Resources
The technology implications of the new standards are likely to be complex and costly, as Gary Reader, Global Insurance Advisory Sector Leader explains: “Many insurers don’t have the system capabilities to capture all of the information that may be required under Phase II. There will also be significant demands on skilled actuarial and finance resources and companies may have to hire additional resources, outsource to third parties and train and redeploy skilled resources.”
Insurance companies are also all too aware of the need to educate analysts and shareholders, who may require a lengthy period of familiarization, to help them understand how and why the accounting and presentation changes will affect reported results.
The challenge, as Reader concludes, is to unite all the strands into a common program: “There are real benefits in adopting a structured approach, starting by identifying the differences between an organization’s current reporting framework and Phase II. This will help insurers include all linkages and dependencies between accounting and reporting, systems and processes, people and the business.”