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Accounting for Insurance Undertakings


InsuranceAs an industry which protects consumers, who can encounter financial difficulties if an insurer becomes insolvent and is unable to pay claims, the insurance sector (along with banking) has always been subject to strict financial reporting requirements.

Financial reporting in the insurance sector in the European Union (EU) is currently governed by a special Company Law Directive (the Insurance Accounts Directive), which was approved in 1991. This directive (91/674/EEC) draws on many of the provisions of the Accounting Directives (the Fourth and Seventh Company Law Directives) and applies to virtually all entities engaged in life and non-life insurance or reinsurance business.

The Insurance Accounts Directive requires insurance undertakings to prepare accounts, which give a "true and fair" view of their financial position and performance, with a balance sheet, a profit and loss account and notes. The directive allows several issues to be treated differently for insurance undertakings, than for companies in general (which are subject to the other EU Accounting Directives). In particular, the Insurance Accounts Directive allows insurance undertakings to value their investments either on historic cost principles or at current value (though if one accounting method is used for the main accounts, the notes to the accounts must present values measured by the other method) and also allows them to make certain adjustments to defer the costs of acquiring insurance policies and to smooth the flow of surplus from investments (through a "fund for future appropriations").

After the EU required (regulation EC 1606/2002) that the consolidated accounts of listed companies should be prepared under EU-endorsed International Financial Reporting Standards (IFRS) from 2005, IFRS 4 became the accounting standard for insurance companies in the EU. The current version of IFRS 4, developed under the First Phase of the Insurance Project of the International Accounting Standards Board (IASB), is viewed as a provisional standard to be used until a more comprehensive standard is introduced. The IASB is currently working with the US Financial Accounting Standards Board (FASB) to develop a more comprehensive standard, commonly known as the Second Phase of the Insurance Project or IFRS 4 Phase II.

In addition to meeting these financial reporting requirements, insurance undertakings need to comply with requirements set by insurance regulators. These requirements are also in a process of evolution. See Regulation of Insurance Undertakings for further details.

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Recent developments/current issues

Phase II of IFRS 4 is intended to produce a standard that will allow users of accounts to understand an insurance company's sources of profit and is aligned with IFRS principles used in accounting for other transactions, especially financial instruments.

The IASB is currently working with the US FASB on finalizing IFRS 4 Phase II. An exposure draft (ED) of the revised standard was published in July 2010 (the text is available here), with a deadline for comments of 30 November 2010.

After carrying out an extensive outreach program to collect comments on the ED from the industry and others (for a summary of the IASB's outreach program see here), the IASB and FASB have decided to make significant changes to the proposed standard and are currently planning to release a revised re-exposure draft in 2012. The implementation date of the new standard has not yet been fixed.

External Resources

External resources

CFRR Resources

Presentations for download

The following materials were presented at CFRR events and provide additional information on insurance accounting. The most recent presentations contain the most up to date information. While the CFRR tries to ensure that this material is as up to date as possible, some of the content, especially in the earlier presentations, may not reflect the latest developments. Presentations in languages other than English are available for the materials given at GDLN events - please follow the link to the webpage of the original event to find these materials.

Right click or option-click the link and choose "Save As..." to download these files.

These three presentations were given at GDLN events for the IFRS for Prudential Regulators group held on 31 May and 6 June 2011. The first presentation summarizes industry reaction to the IASB's exposure draft of IFRS 4 Phase II. The second describes the main issues for insurance regulators that are likely to arise in moving from the existing IFRS 4 Phase I to IFRS Phase II, while the third summarizes the slightly differing approaches to valuation in Solvency II and the IFRS 4 reporting standard in both its Phase I and Phase II forms.

This presentation on the IFRS 4 Phase II project was given at the IFRS for Prudential Regulators seminar held on 8-9 February 2011.

This presentation, which gives a brief overview of developments in bank and insurance regulation and accounting standards, was given during a GDLN event organized for the IFRS for Prudential Regulators group on 15 December 2010.

This earlier presentation on the IFRS Insurance Project was given at the launch event for the IFRS for Prudential Regulators group on 2 December 2009.

Video Presentations

Insurance Contracts IFRS 4 Phase II
Shamim Diouman

Shamin Diouman on Solvency II

Mr Doiumam gives a presentation on the IASB's project to draw up a new accounting standard for insurance undertakings (IFRS 4 Phase II).

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Source: IFRS for Prudential Regulators seminar, 8-9 February 2011

Technical Update for Banking and Insurance Regulators
Shamim Diouman

Shamin Diouman during the GDLN workshop

1. Overview and update on financial reporting and other related issues
2. Update on accounting for financial instruments and Basel III for banking regulators
3. Update on accounting for insurance contracts and Solvency II for insurance regulators

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Source: IFRS for Prudential Regulators GDLN event,
15 December 2010

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