A new draft IFRS for insurance policies was published in July 2010 to replace the existing IFRS 4. IFRS 4 contains International Financial Reporting Standards (IFRS) provisions concerned with the accounting for insurance policies. After a variety of amendments resulting from numerous meetings of the IASB (and FASB) are incorporated, it is expected that the IASB will publish a working draft for review or a new publication draft for comments in the second quarter of 2012.
The new accounting rules for insurance policies in the IASB draft would artificially create a significantly higher level of earnings volatility in the insurance industry, thereby creating major challenges for anyone reading the financial statements. Years of extreme losses would follow years of extreme profits, and perhaps vice versa. However, one of the key purposes of the insurance industry is to give policyholders, and accordingly the whole economy, security and confidence. Confidence is not built by reporting high profits or high losses. Such accounting would therefore be glaringly inconsistent with the stable business model of the industry.
The standard model used for retirement provisions in the life insurance and nursing care insurance sectors traditionally includes guaranteed interest. The insurance industry was able to provide this guaranteed interest even under the highly difficult conditions that existed during the last financial and economic crisis. Creating artificial volatility would endanger the stability of business development in the industry and of key retirement provision products.
It is also likely that the changeover to this standard would generate significant additional expense for the insurance industry.
The new accounting rules have been heavily criticised by the insurance industry, are being discussed in detail with the IASB and are unlikely to enter into effect before 2015. The Managing Board of Vienna Insurance Group is monitoring these developments and will begin preparations to implement the final version of the standard promptly after publication.
