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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 31 / 51

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existing accounting practice. The discussion of the remaining elements of the strategy addresses these issues, again applying the ‘two-tier’ approach as appropriate.

The conclusions to the study rehearse how the emergence of multi-activity financial services and other groups has highlighted the contrasts between the accounting principles now being developed for life insurance and those that are still conventional for other, competing financial products and for the generality of non- financial business activities. The debate over life insurance accounting has been largely driven by the argument that the traditional statutory solvency basis, while reporting the strict legal position and the distributable profits, does not give comparable information on the year’s performance to that given in the accounts for other kinds of business. There is a need to catch up, but in the event the introduction of the IAD and MSSB accounting has made only marginal, if any, changes, and has also currently still left unresolved the fundamental issue of accounting for investment returns.

In the meantime, work has proceeded on developing alternative methods, now under the umbrella of ‘achieved profits’. But as the traditional statutory solvency basis is essentially still that required under ICA1982 for purposes of distribution of profits, these developments have been freed of some of the constraints which apply to accounting for other businesses (where the accounts are the starting point for taxation assessments, and the basis for determining legally distributable profits, in the way that MSSB accounts are in leading continental European countries). Paradoxically, the ‘new’ life insurance accounting is now in many respects in the vanguard of accounting practice, in particular in respect of its attempts to measure the profitability resulting from marketing and selling activity, and to report ‘real’ investment performance. Its conflicts with what are perceived to be the boundaries of normal accounting standards seem increasingly likely to make accounts that comply with accounting standards appear almost as legalistic and lacking in information relevance as accounts prepared strictly for legal purposes.

The developments in life insurance accounting reflect a wider movement towards acknowledging the relevance of value based information for accounting, reflecting the increasing depth and sophistication of markets—whether at the level of transforming individual blocks of contractual cash flows into marketable/securitisable assets, or utilising the expanding markets for derivative products to manage risks, or at the level of financial engineering and valuing ‘goodwill’ and other intangibles in the transactions that restructure whole businesses and companies, or major segments of them, within new group formations. At the same time, the competitive emphasis on branding, marketing and selling is changing the emphasis of management activity towards achieving success on these dimensions as much as in more traditional productive asset and human resource management. In the investment arena, competition, self-regulation, benchmarking by ‘index-tracking’ and changing tax regimes have brought new approaches to investment strategy, at individual and fund management levels, and require new approaches to demonstrating performance and cost efficiency.

Several of those interviewed during the research that underlies this study commented that insurance company management has in the past been able to hide inefficiencies and poor product development and marketing behind the ‘slack’ provided by the build up of large capital funds that were not fully revealed in the statutory solvency based accounts. The new MSSB has weakened this protection to some extent but the full force of the pressures for accountability and disclosure have

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