the cash flow pattern—often (but somewhat inaccurately) characterized as ‘in at the beginning (premiums) and out later (claims)’) and contrasted with that in ‘normal’ businesses where capital outlays are invested to earn future receipts
the need for actuarial expertise in making the necessary appraisals of financial strength
the oversight by statutory regulators who must grant licenses if insurers are to commence and to continue in business
the mutual structure of many insurance enterprises and/or the participation of policyholders in the profits of proprietary (i.e. stockholder owned) companies
However, on closer analysis many (albeit not all) of these ‘differences’ become matters of degree rather than being absolute (Horton & Macve, 2005). Many of the fundamental problems of life insurance accounting are largely the same as those of ‘ordinary’ accounting, albeit in some respects more extreme. So if the ‘insider’ anecdotal prediction that they will not be resolved in the foreseeable future is correct, this also undermines the likelihood of standard setters’ current strategies being able to resolve the fundamental issues in respect of accounting that they are currently re- examining for ‘ordinary’ companies as well (see sections 3 d) and e) below)..
The IASB’s insurance working group for Phase II has been looking at various ‘models’ and examples of life (and non-life) contracts, some of which have been submitted by actuarial consultants.51 Many of these seem unnecessarily complex for the points at issue and more likely to confuse than clarify discussion (cf. Macve, 2004c).
Following the issue of FRS27, ASB has also been working on the second part of its own insurance project with a view to providing a further report to the Treasury. 52
d) Financial instruments and ‘fair values’ This is currently the most controversial issue for standard setters world-wide. The FASB has recently issued an exposure draft (FASB, 2004; cf. Macve, 2004a) on how fair value should be measured, which builds on FASB, 1999 and FASB, 2000. While a framework is being developed which can be applied to all assets and liabilities, a particular focus is fair value for financial instruments. For them the IASB is currently proposing further revisions to its recently revised statement, IAS 39 (IASB, 2004b), to deal with the objections which led to the ‘EU carve-out’ in late 2004 whereby the European Union has only adopted an amended version of IAS 39 for the mandatory implementation of ‘EU adopted’ IFRS by EU listed companies from 2005. The IASB has also recently formed a Financial Instruments Working Group (in which FASB staff are involved) to undertake a fundamental ‘fresh start’ reconsideration of accounting for financial instruments, which is utilising FASB 2004 as a starting point for its discussions on ‘how’ to measure fair value.53 However, the IASB itself has made no commitment to ‘full fair value accounting’. All standard setters regard this as a priority area where international convergence must be sought.
51 52 53 http://www.iasb.org/meetings/wg_obs_ins.asp (accessed 11 June 2005) http://www.frc.org.uk/asb/technical/projects/project0014.html (accessed 11 June 2005) http://www.iasb.org/current/iasb.asp?showPageContent=no&xml=16_99_67_26012005.htm (accessed 5 May 2005).