Done too much, much too soon

Given the recently raised concerns of leading insurance representative bodies in Europe and the US about key elements of the effort to deliver a new set of international accounting standards, few will be surprised to hear that the US and European insurance accounting lobbying community kicked off this year with a determined dual attack on the proposals and an attempt to delay proceedings. The realisation that the European Commission’s Omnibus II revisions to the Solvency II Directive, published in January, could provide an opportunity to seriously slow down that whole process till as far as 2023 in some areas may have well emboldened the accounting lobbyists that are feeling just as pressured as the insurance risk management community by the planned Directive. hideLittle surprise therefore that, in a flurry of strongly worded letters sent to the International Accounting Standards Board (IASB) in London and the Federal Accounting Standards Board (FASB) in the US, industry representative groups voiced grave concerns about the project and urged the two bodies to calm down, take stock and think again. The insurance lobby groups focused their concern late last year on the technical shortcomings of the proposals that the IASB for one would like to see sorted out by this summer. But according to the latest statements from the US and European insurer representative groups, the IASB and FASB have committed to a reform project that is unjustifiably rushed, inadequately coordinated and resourced and will be just as expensive as the much maligned Sarbanes Oxley (SOX) corporate governance rules that were rushed in on the back of a series of dramatic corporate failures such as Enron in 2002. It would be hard to find many individuals within the European and US insurance industry who doubt the sense of the effort to introduce a more coherent, consistent and comparable system of measuring and presenting insurance company figures. The flow of capital into the sector has undoubtedly been hampered by the patchwork of difficult to compare accounting standards adopted around the world. And this situation is exacerbated by the equally inconsistent set of solvency standards that the Solvency II project is attempting to fix at the same time. But the insurers are very worried that an expensive rush-job that is driven by external factors—such as the desire to tie the accounting reform in with the solvency reform—will probably make things worse rather than better. And on this issue the Americans are adopting stronger language than the Europeans. At the end of January the American Council of Life Insurers (ACLI) and the Group of North American Insurance Enterprises (GNAIE) sent a joint letter to Leslie F Seidman, chair of the FASB, in which they warned of the dangers of sacrificing quality for the sake of a deadline that no-one really needs to meet. “Our memberships support high quality financial reporting standards and would not be amenable to sacrificing quality for timing of finalization and implementation. The standard setters have worked tirelessly on developing high quality standards. Establishing arbitrary finalization timelines and backing into a completion plan with hard wired due dates would not cultivate the rigor and due process necessary to implement the standards,” stated the letter. The two groups recognise that there is some appeal to the ‘big bang’ single implementation date approach. But they also pointed out that there is currently far too much uncertainty over the outcome of many of the projects underway at the FASB and IASB that are directly or indirectly linked to the proposed new accounting standards for insurance contracts to justify such an approach. Further, both boards are currently re-deliberating the Financial Instruments standard, IFRS 9, formerly known as IAS 39, which will provide critical guidance on the valuation of assets used to underpin the numbers. And, the ACLI and GNAIE pointed out that the Financial Statement Presentation, and Financial Instruments with Characteristics of Equity Exposure drafts have also not been released for comment. The Americans are also very worried about the availability of resources needed to complete all the extra work that all these new standards would require if the big bang approach were adopted, particularly if convergence of IFRS and US GAAP is taken into account. The groups recommend that a single date should be set for the implementation of any insurance contracts, revenue recognition and financial instruments reform. This date should be a minimum of three to five years after the final guidance for all three of these standards is issued. The US groups said that they believe the cost of such an effort will be huge and easily surpass the SOX effort. They noted that in 2005 the Financial Executives International Survey reported that the average cost to implement SOX Section 404 per company was expected to be $4.4m. Based on initial estimates from their member companies ACLI and GNAIE believe that the accounting changes will cost individual companies at least $10m and the total industry in excess of $1bn. The Americans are also worried about the lack of skilled staff to implement the changes, another possible parallel with Solvency II. “Not only are the amounts staggering, insurers are concerned with the availability of additional quality personnel to successfully complete the project while continuing to conduct operating and financial statement reporting activities,” they wrote. And they doubt that the standard setters will be able to stop themselves issuing new standards while the industry comes to terms with the current planned changes, making it even more difficult for the embattled insurance company finance departments. “While companies are working toward implementation and completion by the effective date, the project scope does not take into account potential additional efforts due to the issuance of other new standards during the implementation period. It is unlikely standard setters will be able to place a moratorium on issuing other new guidance during this time period,” they stated. ACLI and GNAIE also warned that the task will be made even more difficult if the FASB and IASB fail, as is likely, to agree a common set of rules, at the same time leaving the industry to implement two new sets of rules simultaneously. The Europeans delivered a somewhat less emotive, but in many respects just as damning verdict to Sir David Tweedie, chairman of the IASB, in a letter dated January 28. It was sent in response to the London-based standards group’s Request for Views on Effective Dates and Transition Methods. The letter was drafted jointly by the European Insurance CFO Forum, the body that represents the views of 21 of Europe’s largest insurance companies, and the Comité Européen des Assurances (CEA), which represents 94% of the European insurance market. The Europeans agreed wholeheartedly with their American counterparts that mandatory adoption of the new insurance contracts standard must be aligned with IFRS 9 and that the effective date should be no earlier than 2015. It also therefore welcomed news from the IASB that it may consider a delay in IFRS 9 to match the insurance standard. “We believe that a fundamental aspect of insurers’ business models is asset/liability matching and therefore the measurement basis for insurance contracts must be developed concurrently with the proposals for financial instruments. We therefore support the IASB’s comments that it would reconsider the effective date of IFRS 9 as part of its finalisation of the proposed IFRS for insurance contracts,” stated the European groups. The bodies added that they do not believe that the two year implementation period usually applied to new standards is sufficient in this case because of the ‘fundamental changes’ the proposals would bring to the insurance industry and the ‘associated operational challenges.’ The Europeans also pointed out that if the insurance standard implementation date was aligned with IFRS 9 then the IASB may as well also align the date with its planned new standard on revenue recognition because it also ‘interacts’ with IFRS 9. The CEA and CFO Forum also said that they have ‘concerns’ around the transition arrangements for the insurance contracts Exposure Draft suggested by the IASB. The groups stated in their letter to the IASB in November (see last issue of Commercial Risk Europe) that the IASB’s transition suggestions are simply not ‘fit for purpose’. And the Europeans again called for convergence between the IASB and FASB positions but, critically, only as long as it does not affect the principles-based nature of the standards. “We do not see any rationale for not having the same effective date and transition arrangements for comparable IFRS and US GAAP standards,” they stated. Given that the FASB and IASB are still at very different stages in their projects this effectively supports the case for further delay, as the process would complicate for political reasons as the two projects align. To make matters worse, the efforts by the IASB and FASB to reach a common, or at least aligned, position in the currently tight schedule came under fierce attack in the US where it has been suggested that sharp corners were being cut to try and meet unnecessary deadlines. This came in the form of a response issued by GNAIE and ACLI, along with the National Association of Mutual Insurance Companies (NAMIC) and the Property Casualty Insurance Association of America (PCI) to an agenda paper published by the IASB and FASB prior to their joint meeting on February 2. This paper set out certain ‘axioms’ and ‘assumptions’ that the IASB and FASB staff suggest should be used to underpin the development of the Exposure Draft issued by the IASB and the FASB’s discussion paper on insurance contracts. The US insurance industry was not impressed by this move. “We were extremely surprised by both the timing and content of the staff paper given the widespread criticism the boards received on the IASB proposals from investors, analysts, preparers and a variety of other stakeholders,” stated the groups. They added that the staff paper suggested that the boards were about to jump the gun by dropping the idea of a ‘more complete’ discussion of the issues that arose from the discussion papers and various roundtables that have taken place in recent months following the publication of the IASB ED and FASB paper. “We trust that this will continue to be the plan. The staff paper seems to recommend that certain critical yet controversial elements of the proposals [not least discounting of certain short tail liabilities] would be assumed away, and therefore not be re-deliberated. This is counter to the discussions at the board in previous agenda discussions of the project plan,” stated the US industry groups. The groups are concerned that if the boards approve the latest recommendations in the agenda paper this would represent a ‘significant departure’ from the due process that they had committed to. “We suggest that the staff withdraw this paper and allow the previously planned re-deliberation process to evolve and address all of the significant issues identified by key constituents in both the comment letters and in the public roundtables,” stated the groups. “We believe robust accounting and reporting standards emerge from a process where critical issues are carefully evaluated and comprehensively re-deliberated before a final standard is issued. Any decision that would diminish the evaluation or re-deliberation of critical issues identified in the comment letter or public roundtable processes should be reconsidered,” continued the US lobby groups. Whether or not the IASB and FASB will listen to this ever-growing list of concerns remains to be seen. Perhaps the most positive indication received to date that a real rethink could be on the cards was the news from Brussels that the EC has given itself some potentially serious breathing space on Solvency II via its Omnibus II proposal. If this is followed up with a concrete delay in the timetable for the solvency standard then surely that would remove the need for a rush-job on the accounting standard? Europe’s risk managers may well think that they can happily ignore all this nonsense as they struggle to work out how Solvency II will impact them. But they would do so at their peril. Fundamental changes to the way insurance contracts are defined, measured and costed could have a massive impact on the cost of coverage and availability of capacity just as Solvency II will. Also, no-one yet seems to have thought about how these accounting standards would impact captives. But you can bet that they will and in a most unexpected and unwelcome way.

Done too much, much too soon

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