Standards – Draft SORP a rollercoaster

Insurance company profits could set off on a rollercoaster ride if plans to account for gains and losses on their investments in the profit and loss account get the go-ahead.

The plan is included in a draft Statement of Recommended Practice (SORP) put forward by the Association of British Insurers. It said insurers’ profits should go up and down according to the gains and losses on both unrealised and realised investments.

The association said it recognised the performance of unrealised investments could be volatile, but argued financial information provided by insurance companies should be more transparent.

Deryck Wright, head of financial reporting at the association, said investors were confused by insurance company accounts because they had been allowed to account for the performance of their investments in different ways.

He said it had become common practice among general insurers to account for unrealised gains and losses in the balance sheet.

‘We are proposing all the gains made by the insurer’s investments – realised and unrealised – should go in the p&l,’ commented Wright. ‘This will make (the p&l) more volatile, but we think we have taken account of that.’

Wright said the proposals would include a provision for a ‘memorandum/disclosure that will allow an insurer to show the long-term rate of return on investments. This is aimed at listed companies that want to explain their results to shareholders.’

The consultation period for the SORP ends on 28 April.

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