International Insurance Financial Report Standard: The Latest Development And The Impact On Chinese Insurance Industry

The Board’s (IASB) predecessor organization, the International Accounting Standards Committee, began a project on insurance contracts in 1997.The Board was constituted in 2001 and included that project in its initial work plan. Because it was not feasible to complete the project in time for the many insurers that would adopt International Financial Reporting Standards (IFRSs) in 2005, the Board split the project into two phases. The Board completed phaseⅠin 2004 by issuing IFRS 4 Insurance Contracts, which:(a) made limited improvements to accounting practices for insurance contracts.(b) permitted a wide variety of accounting practices for insurance contracts to continue, thus avoiding major changes that phaseⅡmight reverse. (c) required an insurer to disclose information about insurance contracts.The Board aims to complete phaseⅡof the insurance contracts project by issuing an IFRS based on the proposals in the exposure draft. The objective of phaseⅡis to develop a high quality standard addressing the recognition, measurement, presentation and disclosure requirements for insurance contracts. The Board believes that IFRS 4 cannot remain in place indefinitely because it permits diversity in practice, including many practices that do not provide users of financial statements with information that is relevant and representationally faithful. In particular, existing practice has the following flaws:(a) Some practices have developed in a piecemeal fashion over many years and do not provide a coherent framework for dealing with more complex contracts (such as multi-line or stop-loss contracts) or resolving emerging issues with new types of insurance contract.(b) Accounting methods have sometimes been tailored more to meeting the needs of insurance regulators than to meeting the sometimes different needs of investors and other capital providers. (c) Some practices used by insurers differ from those used by other entities, particularly other financial institutions, such as banks and fund managers, but there is not a sound reason for all those differences. These differences impede comparisons between insurers and other financial institutions. They can also mean that financial conglomerates produce financial statements that are internally inconsistent.In May 2007 the Board published a discussion paper setting out its preliminary views on the main components of an accounting model for an insurer’s rights and obligations arising from an insurance contract. The Board received 162 comment letters in response. Most respondents said that a new IFRS for insurance contracts was needed urgently and agreed with the Board that the measurement of an insurance contract should take into account three building blocks:estimates of future cash flows, the effect of the time value of money and a risk adjustment. However, virtually all respondents had significant concerns about particular aspects of those building blocks.After publishing the discussion paper, the Board continued to consult the Insurance Working Group, a group of senior financial executives of insurers, analysts, actuaries, auditors and regulators that was established in 2004. In addition, in 2009 the Board conducted field tests to understand better some aspects of the practical application of the proposed insurance model. Sixteen insurers, based in Asian, Australian, European and North American markets and with life, non-life and reinsurance businesses, participated.The exposure draft proposes a comprehensive measurement approach for all types of insurance contracts, although a modified version of that approach would apply for some short-duration contracts. That comprehensive measurement approach:(a) would measure an insurance contract using a current assessment of the amount, timing and uncertainty of the future cash flows that the insurer expects the contract to generate as it fulfills the contract.(b) would provide information about the main drivers of insurance contract profitability in the current period.Under the background of financial accounting rules to be harmonised globally, the introduction of IFRS framework will not only have a substantial impact on accounting but also on the way business itself is conducted.The rules have specific implications for the various business segments_life, non-life and reinsurance, which will be affected in varying degrees.