Financial Accounting and Reporting for UK Listed Insurance Groups

Course Overview:

This course is intended to give preparers and users of the published financial reports of UK listed insurance entities a detailed insight into:

• the current regime for insurance accounting under the supposedly ‘temporary’ IFRS4 published in 2004, with special emphasis on the practical problems arising from its lack of a comprehensive conceptual basis; and
• the current state of play in the progress towards a comprehensive new standard, with special emphasis on its primary characteristics, the outstanding unresolved issues, and the interface with other existing and proposed standards (especially IFRS 9); and
• the challenges that are likely to arise in the long period of transition to final adoption in about 2017

Course Content:

Day One:

The Current Regime Introduction to Accounting for Insurance Business

• Why insurance accounting is generally problematic:
  • Very long timescales
  • Uncertainties of future cash flows
  • Matching of revenue with expense
  • Complexity of products, especially optionality characteristics
  • Requirement for financial and regulatory reporting to be aligned (unlike banking / Basel)
• Why insurance accounting poses specific problems to the IFRS regime;
  • Primary focus of IFRS: providing relevant and reliable information about the
    • Amount
    • Timing
    • Uncertainties of future cash flows
• Time value of money: to be identified, quantified and separately accounted for
• Risk: to be explicitly identified and quantified
• Strict distinction between equity and liability: problematic for insurance products with discretionary participation features
• IFRS regime for insurance companies’ principal assets (financial instruments): not especially ‘insurance-friendly’: result – accounting mismatches

Overview of current ‘patchwork’ regime

• IFRS 4 (2004) as a ‘holding operation’:
  • Lack of consistent principles, with partial exemptions from IAS 1, IAS 8 and Framework
  • Overview of banned and permitted existing practices, and scope for ‘improvements’
• Study of selected features of existing IFRS 4 treatment:
  • Definition of ‘insurance contract’
  • Unbundling
  • Treatment of [deferred] acquisition costs
  • Treatment of optionality features including discretionary participation features
  • Asymmetric treatment of assets and obligations
  • Inconsistent use of historic cost and fair value methodology

Case Studies

• The Equitable Life case and its lessons
• Detailed examination of impact of inconsistencies in current regime on comparability between;
  • Two UK insurers
  • A UK group and a continental European group

Day Two: The Proposed Regime

• Outline of the new model for all insurance contracts
• The two components:
  • Risk-adjusted expected present value of all cash flows arising from fulfilment
  • Contractual service margin reporting profitability over the coverage period
• Estimating the expected value of cash flows:
  • Explicit, current estimates at the reporting date
  • Estimates that do not contradict available market information
  • Unbiased use of all available information
• Identifying the cash flows to be included:
  • Cash flows from future premiums
  • Acquisition costs
    • Basis of measurement
    • Basis of identification
• Adjusting the cash flows to reflect the time value of money
  • General principles for all contracts
  • Accretion of interest on the contractual service margin
  • Using current, market-consistent estimates of time value of money
  • Reflecting liquidity factors in the discount rate
  • Disclosure of yield curve
  • Reflecting dependence of assets on the discount rate
• Adjusting the cash flows to reflect risk
  • General rationale for risk adjustment
  • Techniques for adjustment
  • Confidence level disclosure
  • Diversification benefits
• Other issues:
  • Recognition and measurement of the contractual service margin
  • Reinsurance contracts held
  • Business combinations
  • Separating components and embedded derivatives

Outstanding issues

• The second (June 2013) Exposure Draft:
  • Adjustments for changes relating to future insurance coverage
  • Cash flows expected to vary with returns on underlying items
  • Presentation of revenue and expense
  • Determining interest expense
• The interface with new IFRS 9 Financial Instruments:
  • Problems arising from the original two-test basis for classification of assets (business model and cash flow characteristics)
  • Problems arising from the IASB’s proposed amendments: ‘AFS by another name’?
• Transitional considerations:
  • ‘IFRS 4 Replacement’ not to be published until IFRS 9 is finalised: the IASB-EU stand-off and its implications
  • Further 3-year delay planned before IFRS 4 Replacement becomes mandatory in 2017 – or even later?
  • Problems arising from introduction of Solvency 2 before IFRS 4 Replacement