New standard could hit profits

No international rule on insurance contracts exists at present, but the International Accounting Standards Board has made it a priority and intends to issue a draft rule by the end of this year.

Hans Schoen at KPMG Netherlands has warned that the impact ‘should not be underestimated’.

‘Increased volatility will be the result and the proposed changes will also have a major impact on systems, management reporting and budgeting and, probably, even on the way insurance business will be conducted and managed,’ said Schoen.

More worrying for the industry however are the losses it could suffer under international rules.

Nigel Masters, partner of PricewaterhouseCoopers’ actuarial insurance management services, said: ‘Many of today’s policies would record an embarrassing loss on a very prominent IAS “new business contribution” line.’

Hitesh Patel, financial services partner at KPMG, added: ‘There may well be losses for certain types of business, in particular products which include guarantees and annuity rates.’

The main sticking point centres around which measurement method to use. The IASB’s preferred method is the asset-liability model which advocates say provides more transparency.

The insurance industry argues however that it will increase volatility and short-termism into a sector based on long-term performance.

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