IFRS Goals Elusive in the EU, says A.M. Best

Common financial reporting standards in the European Union may not be that consistent after all, according to an A.M. Best report.

Although the EU’s public insurance companies adopted International Financial Reporting Standards (IFRS) in 2005, “very little has been achieved” when it comes to cross-border compatibility or market measurements, say A.M. Best analysts in the report, to be published July 6. The analysts point to varying amounts and quality of data from insurers, as well as inconsistencies in how they treat liabilities, deferred acquisition costs and valuation of financial assets, noting that the situation calls for closer interaction with companies and more detailed data.

One of IFRS’ biggest challenges is classifying products–having insurers clearly distinguish between insurance and investment contracts, since different valuation rules apply. Most EU companies still use their own methods to classify the two, along with other financial assets—for instance, many EU insurers don’t use the mark-to-market approach used by their U.K counterparts to smooth underwriting results.

So-called “unbundling” is more straightforward in the U.K., where practices and regulations already treat insurance and investment contracts separately, whereas on the Continent, most long-term contracts have investment guarantees, which insurers either won’t separate, or assume that the deposit element is already covered by local accounting policies, the report points out.

The somewhat lopsided approach to IFRS doesn’t fall solely on companies. The report notes that IFRS “unfinished” status—certain elements, like measuring insurance liabilities have been left to Phase II—have assets calculated by fair value, while liabilities are left to local regulations. 

Overall, the inconsistent approaches distort top-line numbers and how other key measures are calculated, according to the analysts. They also affect disclosure, which “seems to reflect the degree of market pressure for quality information more than a willing attempt to comply with standards.”

But the fallout may be even greater. The report points to the linkages between IFRS, Solvency II, and MCEV (market consistent embedded value principles, which will be mandatory for European CFOs by 2011), noting “a significant interdependence that makes the success of one almost impossible without the completion of the others.”

This story was originally published by Canadian Insurance Top Broker.