Global standard for insurance contracts required: Fitch

Establishing a global fair value method for valuing insurance contracts will help to determine how fair value should be defined for insurance reserves, according to a special report by Fitch Ratings on global accounting and financial reporting.
Fitch notes the International Accounting Standards Board (IASB) has published a discussion paper about insurance contracts, and the Financial Accounting Standards Board is assessing whether it will do the same.
“Much of the [IASB] paper’s focus is on trying to establish how fair value should be defined for insurance reserves, given that there is no liquid market for insurance contract liabilities,” Fitch notes.
Fitch goes on to observe the IASB proposes an approach known as the current exit value (CEV) approach. The CEV approach, says Fitch, involves “recognizing certain future revenue upfront and discounting this in addition to expected future outflows while factoring a ‘risk margin’ for the uncertainty of these expectations.”
The ratings agency goes on to add “the CEV method of valuing insurance contracts is largely unprecedented in practice, although there are some similarities with embedded value reporting used particularly by some European insurers, and may prove challenging to implement. However, there is a consensus among Fitch analysts that their work will benefit from a global standard for insurance contracts.”