Companies will not recognise premiums as revenue (except where the short-duration simplified model is used), but would separately show an underwriting margin and changes in cash flow estimates and experience variances. Supplemental disclosures will provide the more traditional premium and claims-incurred information.
• The IASB short-duration simplified model results in a similar presentation to current industry practice for insurers where companies recognise premium review and claim other expenses on the face of the income statement. However, the current proposals mandate the simplified model for contracts that qualify; therefore, companies with both types of contracts would have to report under both of the two different presentation styles.
Solvency II Companies with a captive based in Europe or other jurisdictions
that are adopting Solvency II or equivalent frameworks (for example, Bermuda) will have been closely monitoring the impact of Solvency II on their capital requirements. In so far as the measurement aspects of Solvency II, there are some synergies with the insurance contracts project, but there will remain some differences too. The key measurement differences (specifically relevant to insurance liabilities) under Solvency II are:
• Risk adjustment using a prescribed 6 percent cost of capital • No residual margin
• Acquisition expenses are expensed on day one • No short-duration model.
Effective date The IASB expects to issue a final standard in mid-2011. An effective
date has not been proposed yet, although it is acknowledged that the IASB standard would not be effective before 2013 and general consensus is that 2014 will be the implementation year. The FASB’s next step, after gathering comments on the discussion paper and considering public feedback received by the IASB, will be to determine whether its exposure draft of a proposed standard should use some version of the models described in its discussion paper, or instead make targeted changes to existing US GAAP.
The proposals represent a fundamental change for the insurance
industry and, if implemented in their current form, will have a significant impact on measurement and presentation. While the timeline leaves a good amount of breathing room to take stock of the joint project and any changes from the comment phase, given the potential impact of the changes being considered, companies will soon want to begin assessing the implications of the possible changes on existing contracts and current business practices and systems.
Damian Pentney is a partner at PricewaterhouseCoopers. He can be contacted at:
damian.pentney@
ky.pwc.com
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