Insurers in balance-sheet turmoil

EU insurers stranded in a no-man's land between different financial reporting regimes will be seeking to make themselves heard at talks with the International Accounting Standards Board (IASB) this week (29-30 June) in London.

At present, insurance companies in the EU are juggling with a range of inconsistent accounting principles for assets and liabilities. International standards issued by the IASB are used for both areas, but the one currently being applied to liabilities (IFRS 4), an interim solution based on slightly adjusted local accounting practices, is breeding discontent in the sector.

"The insurance industry is unhappy about the situation today," said Beno"t Jasper, of Italian insurance group Generali. "All listed companies in Europe have been obliged to follow IFRS since January 2005. Our problem is that we have a solution for assets, but not for liabilities."

Jasper is currently heading a working group set up by the CFO Forum, a group of insurers that have joined forces to tackle the issue. The group, which includes Allianz, AXA, Fortis, Scottish Widows and Zurich Financial Services, will be pressing the IASB for clear guidelines on the measurement of liabilities. The group has been seeking the support of the European Commission this week.

The nature of the insurance sector, an industry whose business is uncertainty, is such that profits and losses are hard to measure on anything like a traditional basis. The sheer range of insurance policies in existence, covering anything from the risk of natural disaster to life insurance, and spread out over various time periods, makes it difficult to put a definite market value on liabilities.

The insurers argue that using the current muddle of interim standards undermines the value of an already complex exercise, making it difficult to produce consistent comparisons with businesses across different sectors that would enable the industry to compete effectively for capital. Insurance companies feel that they are being unfairly penalised.

"There is no level playing-field with other industries," said Jasper. "We don't only compete within the insurance industry, we also compete for capital with other industries. We pay the price [of inconsistent standards] in terms of stock market capitalisation and business development. The key message of our proposals is that profit should be recognised as risk is released."

Iain Coke, head of financial services at the Institute of Chartered Accountants in England and Wales, said: "Accounting for insurance is complicated. Traditionally, insurance has been more divergent than other types of regulation. There are big differences across the world, which makes life difficult for the IASB and the EU."

The IASB's final standard for liabilities, aimed exclusively at the insurance industry, may not be ready before 2010. "Each step of the process takes six to nine months. In this respect, 2010 is not that far off. Our plan is to have the first discussion document produced by the end of this year," said Wayne Upton, director of research at the IASB.

EU insurers are keen to ensure that the final principles proposed by the IASB do not conflict with Solvency II standards currently being developed by the European Commission for risk assessment. Jasper stressed that Europe should play an active role in helping to shape an international standard. "We don't want to follow from afar. Industry wants to be active," he said.

Coke agreed that IASB standards should not diverge from Solvency II. "It's important that the two do not go ahead in isolation without one another," he said. "There is the danger, if they do not work together, that they come up with models that look similar, but aren't actually the same."

But European insurers will not be alone in pressing their case this week.

A group of European insurers and American insurers and insurance supervisors have come up with different proposals to be aired at this week's meeting. Upton said the proposals were "similar in some respects, different in others", adding: "We consult with people and are always interested in hearing their views."

EU insurers stranded in a no-man's land between different financial reporting regimes will be seeking to make themselves heard at talks with the International Accounting Standards Board (IASB) this week (29-30 June) in London.