The comments are pouring in

By Lesley Thomson, FCIA

On July 30, 2010, the International Accounting Standards Board (IASB) published its long-awaited exposure draft of the International Financial Reporting Standard (IFRS) on Insurance Contracts. The comment deadline was November 30, 2010, and at the time of writing of this article, 239 comment letters have been submitted. Regulators, actuarial and accounting bodies, insurance companies, consulting firms, industry groups, analysts and individuals from around the world have provided their views to the IASB.

Not surprisingly, the opinions are wide-ranging. The CIA submitted its comments on November 24 (comment letter #21 on the website), and while some of our concerns are echoed in other comment letters, others appear to be uniquely Canadian.

I’ll start by admitting that I haven’t read all 239 comment letters. However, the IASB staff has, and they also undertook an extensive program of outreach activities to complement the formal consultation. Those activities included live and recorded webcasts, Q&A sessions, participation in conferences, and meetings with industry trade groups, individual preparers, accountants, actuaries, auditors, regulators and users from a number of countries. They are listening, and this article summarizes what they tell us they’ve heard so far.

First, there is a high level of support for the IASB developing an IFRS for insurance contracts. The current diversity in accounting practices around the world isn’t useful, and most believe it would be better to have an imperfect standard than no standard at all. Canada’s view is mixed in this respect. While we support the goal of a consistent standard around the world, some here don’t wish to take what they see as a step backwards from the approach we have in place today.

The critical issue raised in almost all jurisdictions (including Canada) is the volatility in income that would arise under the proposed measurement model. The main culprit is the discount rate for non-participating contracts, which would be based on risk-free rates plus an adjustment for (il)liquidity. Assets supporting liabilities would be measured at fair value, so fluctuations in credit spreads on those assets would not be matched by corresponding changes in the value of liabilities.

Alternatives proposed for the discount rate include:
(a) An asset-based rate, possibly adjusted to reflect defaults and other adverse deviations to the return. One variation of this alternative would use the rates used to price contracts;
(b) A rate locked-in at inception ("amortized cost");
(c) A rate that reflects sector non-performance risk—for example, a high-quality bond rate; and
(d) An approach that puts a portion of the change in value through Other Comprehensive Income.

Another widespread concern (shared by Canada) is that the criteria for unbundling components are not clear, and that unbundling involves significant cost to preparers for little, if any, benefit to users.

One area where Canada appears to be a lone voice in opposition is the residual margin, an amount added to the initial liability that ensures no front-ending of profit, and in fact ensures a minimum loss at issue. This feels like a step backward to the days where strain at issue was a fact of life, and we have to find ways to convince users that sales are good thing.

Many other concerns have been raised, and the IASB staff has a huge job sorting through it all and facilitating the IASB discussions needed to get to a final standard. The IASB still hopes to have the final standard in place by June 2011, with an effective date likely a few years after that. The feedback was pretty much unanimous that we need a long time to implement the significant changes that the IFRS for Insurance Contracts will bring.

Lesley Thomson, FCIA, is Chair of the CIA Task Force on International Accounting and Actuarial Standards (Insurance).