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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 32 / 51

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appeared primarily in the demands for accounting for ‘achieved profits’ on a realistic basis and for identifying the ownership of the inherited estates.

In developing new approaches to measuring their business performance, UK life insurers, who have traditionally kept well below the parapet as controversies have raged over the accounting and reporting required of other kinds of businesses, now find themselves as the revolutionaries of the accounting world—albeit perhaps as reluctant revolutionaries!

The study outlines the essential elements, as the authors see them, of the strategy that now needs to be adopted if insurers, in company with other businesses, are to argue for the continuance of that revolution in ensuring that the standards set by ASB, and now even more importantly by IASC,64 provide an adequate basis for demonstrating accountability to stakeholders and for accounting for business performance. The ‘two-tier’ approach advocated here allows for continuance of the present rules as the ‘default level’ standard—but for potential development of new accounting methods in appropriate circumstances. In this way standards would work with, not against, the grain of business realities and of how managements run their businesses.

The emphasis in this study, as in most of the accounting developments in insurance, is on proprietary insurers and other groups. Work needs to continue on researching the special circumstances of mutual companies and the needs of their stakeholders in order to develop appropriate mechanisms of accountability and measures of business performance that reflect their alternative capital and ownership structures.

c) Klumpes, 1999 ‘Measuring the Profitability of UK Proprietary Life Insurers’ This paper builds on the ‘earned profits’ approach of O’Brien (1994) and models the ways in which this, the MSSB basis and ‘achieved profits’ bases incorporate different elements of the profitability of the current book of life policies.

The abstract states that ‘this paper compares and evaluates various legal and economic methods to measure and report UK life insurance company profitability in terms of their (i) treatment and recognition of profits emerging from life insurance business over time; and (ii) compliance with «true and fair view» requirements of the Companies Act and the concepts set out in the Accounting Standards Board (‘ASB’) proposed Statement of Principles. A simple life insurance policy model is used to demonstrate the differential impact of each method on the pattern of profit recognition over time. Legal methods of reporting ‘profit’ used by the UK industry to comply with conservative UK solvency regulations fail to provide inventors with insight into the value of the business. Economic methods provide a more ‘realistic’ basis for reporting to shareholders by incorporating discounted future profits into the value of life insurance business, but these do not accord with the European Union Insurance Accounts Directive (‘IAD’). A legal ‘earned profits’ method, although not endorsed by the industry, is the only one that appears to provide a ‘true and fair view’ as envisaged by the Companies Act and meet the objectives of the ASB. Various outstanding issues between the industry-endorsed economic methods and the ASB's requirements are discussed.’

64

Now superseded by IASB.

32

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