The Accounting Standards Board of Canada (AcSB) expects the implementation of the International Financial Reporting Standards (IFRS) standards to clarify lingering grey areas in the life insurance industry. The AcSB says it is working with the industry to influence the process on the international level.
The Canadian Institute of Chartered Accountants (CICA) members Peter Martin and Ian Hague are also active on the AcSB. Mr. Martin is the Director, Accounting Standards and Chief of Staff at the Board, and Mr. Hague is the Principal and the most senior member of the staff. They agreed to answer The Insurance and Investment Journal's questions about the potential pitfalls that await insurers.
They are well aware of the headaches that phase II may cause for insurers. All the same, Mr. Martin and Mr. Hague believe that the way liabilities of a policy are valued presently is still murky. This grey area must be eliminated, they say. "Nobody knows really what the actual value of an insurance liability is. If there was a practical way to determine it, everybody would be happy to adopt that. But that's actually impossible to determine because there isn't a market for those the same way there is for stocks and bonds, Mr. Martin says.
Despite its status of intermediary between the IASB and public companies, the AcSB is equally in the dark about the form of the final IFRS. "Things change from month to month," Mr. Hague explains. He adds, though, that the industry will have to shelve the currently used Canadian Asset-Liability Management (CALM) valuation method.
This comes as no surprise. Mr. Martin and Mr. Hague say that think tanks made up of auditors, financial analysts, bankers and insurers have been regularly offering advice and suggestions to the IASB. Consultations on this topic have been under way for almost 13 years, they say. "Everybody had the opportunity to comment on the ideas we're working with," Mr. Martin says.
When the exposure draft comes out, there will be a testing period and people will come back with comments on it, to improve and modify it, Mr. Martin adds. "One should expect quite an extensive consultation process around the exposure draft. Month by month discussion of pieces will continue until it covers all the issues," he continues.
Sun Life Financial has been part of this regular collaboration. "Sun Life provides comments and suggestions to the IASB directly, or through our peers and groups of professionals. We are watching the IASB's progress and its impact on our business model," says Noeline Simon, Vice President, International Financial Reporting Standards at Sun Life.
Sun Life is not opposed to the contentious change in valuation. "At this time there are no plans to revisit the evaluation at market value," Ms. Simon adds.
The insurer has other concerns, namely IAS 39, related to classification and measurement of financial instruments The IASB plans to amend the standard to simplify the accounting and valuation of these instruments.
This replacement will happen in three main phases, the IASB's website explains. Phase I, classification and measurement, may apply already since the end of last year, even if it is not yet mandatory. The second phase, outlined in an exposure draft in November, concerns the impairment methodology for financial assets. The third phase deals with hedging activities or hedge accounting, and will be presented in an exposure draft in the first quarter of 2010.
"The changes to the standard are likely to have a pervasive impact on insurers. The industry has and will continue to review the impacts, and work with the IASB to convey their concerns," Ms. Simon points out.
For their part, regulatory organizations are already acting as if IFRS were a done deal. "We eagerly await the new International Financial Reporting Standards (IFRS) that will apply to the insurance industry. As new accounting rules can have material impacts on reserve levels, we need comfort that ultimate reserve levels will be prudent," said Julie Dickson, Superintendent of the Office of the Superintendent of Financial Institutions Canada (OSFI) at the 2009 Life Insurance Forum in Cambridge, Ontario, on Nov. 12.