Insurance as a subject matter is generally considered to be as staid as economics. Even more so, when it involves prescribing accounting standards for an insurance company. The general conception of an insurance company is that one keeps paying premium till death or a particular time-period after which a lumpsum is paid out. This should not cause any complications in accounting. However, the fact that the International Accounting Standards Board (IASB) has decided to issue a separate accounting standard on insurance contracts, IFRS 4, warrants a statement that insurance contracts need accounting standards.

Common standard

In an attempt to pronounce a one-size-fits-all standard for insurance companies, the CFO forum, Group of North American Insurance Enterprises and four major Japanese life insurers met and arrived at some conclusions on accounting for life insurance companies. Here are a few salient points:

All insurance liabilities, including non-life insurance claims liabilities, should be measured on a discounted present value basis.

Non-life pre-claim liabilities should be measured at current exit value.

The measurement of an insurance liability should include an explicit and unbiased estimate of the margin that market participants require for risk and service margins.

The measurement attribute for insurance liabilities should be the amount the insurer would expect to pay today if it transferred all its remaining contractual rights and obligations immediately to another entity.

An insurer should use cash flow estimates that reflect the efficiency of market participants.

Any changes adverse or favourable in estimates of financial and non-financial variables should be recognised immediately.

Discount rates should be consistent with observable market prices for cash flows whose characteristics match those of the insurance liability in terms of timing, currency and liquidity.

For recognition and measurement purposes, an insurer should not unbundle insurance, deposit and service components of insurance contracts if the components are so interdependent that they can be measured only on an arbitrary basis.

The insurance company should recognise acquisition costs as an expense, not as an asset. The recovery of acquisition costs should occur either through cash flows that have been received or through future cash flows incorporated in the measurement of the liability.

The current exit value of a liability reflects its credit characteristics. An insurer should reflect the effect of such credit characteristics at inception and subsequent changes, if any, in their effect.

Indian scene

In India, there is no specific accounting standard for insurance. However, the Insurance Regulatory Development Authority (IRDA) has been keeping a watch over the operations of insurance companies and has also prescribed specific disclosure requirement for them.

The mushrooming of private insurance players and the variety of schemes offered by them also add to some complications in accounting. Insurance schemes are now bundled with investment schemes giving mutual-fund-like returns over a timeframe. It appears to be only a matter of time before we had a separate accounting standard for insurance companies.

Mohan R. Lavi
(The author is a Hyderabad-based chartered accountant.)