KPMG: Proposals to affect insurers

New accounting methods will affect the way re/insurers report their profits.

KPMG in Bermuda said it welcomed the revised insurance accounting proposals, published today by the International Accounting Standards Board.

KPMG said it will be a major step towards modernising and harmonizing insurance accounting.  

Richard Lightowler, head of insurance for KPMG in Bermuda, said in a press release:  “The proposals and their application are likely to be complex. This is the last chance for insurers and users to influence the outcome of the project. Given the current diversity in practice, KPMG considers it essential that the IASB finalises its insurance standard. 

“The IASB’s proposals would affect the way in which insurers report their profitability and financial position and would likely result in an overall increase in volatility in profit or loss and equity for most insurers as a result of having to continually remeasure insurance contract liabilities at a current value, rather than on an historical cost basis.”

Gary Reader, KPMG’s global insurance advisory leader said:  “The level of change and the complexities associated with implementing these proposals should not be underestimated. Insurers would be likely to feel the consequences throughout their organisations. The devil is in the detail and the scale of change would depend on the accounting bases that insurers use today.”  

The proposals would be likely to result in greater emphasis on the entire statement of profit or loss and OCI rather than just profit or loss. These changes to the accounting and financial reporting requirements would need to be explained to analysts, investors and other stakeholders.

Insurers may have to contemplate major changes to data and systems, education and communication to stakeholders and changes to asset-liability management. Profit profiles and product offerings may be impacted and insurers would need to ramp up resourcing in the finance and actuarial functions. However, some insurers would be able to re-use and repurpose current efforts to implement accounting change for financial assets and for regulatory purposes.  

The re-exposure also introduces a new presentation approach for both the statement of profit or loss and OCI and statement of financial position, which would dramatically change the way insurers – especially life insurers – report performance. Insurance contract revenue would be allocated over the coverage period in proportion to the value of the services provided in each period, which would be completely different to the premium figures presented today.  

Tom Kelly, managing director at KPMG in Bermuda explains: “For insurance and reinsurance entities based in Bermuda, the impact will vary greatly depending on line of business and global spread. Bermuda’s SEC registrants will also be keeping a keen eye on where the FASB will end up with their insurance contract project and what differences will remain upon finalization of both. With this release the insurance industry is one step closer to the long anticipated ovehaul of insurance accounting.”

He said ehe BMA will also be looking forward to the completion of these projects as it will assist in the introduction of an Economic Balance Sheet regime that dovetails with the new standards.