Insurer accounting standard draft contains “fundamental” changes for Canadian insurers: PwC

The most recent International Accounting Standards Board draft contains fundamental changes that would alter existing Canadian P&C valuation methods and the way that insurers’ income is presented, PricewaterhouseCooper’s said in its Fall 2010 Insurance Review.
The proposals are the result of the IASB and the Financial Accounting Standards Board’s joint efforts to develop a single converged insurance accounting standard.
The “fundamental” changes proposed by the new standard include a new measurement model for insurance contracts that would replace the existing Canadian P&C actuarial valuation methods.
Also, a markedly different income presentation focuses on changes in margins and estimates instead of the more familiar premiums and claims line items, PwC said in the article, Insurance contracts – fundamental accounting changes proposed.
The current measurement model includes an explicit risk adjustment for the effects of uncertainty about the timing and amount of future cash flows.
“This adjustment is the maximum amount the issuer would pay to be relieved of the risk that the ultimate cash flows exceed those expected,” the article says.
The inclusion of an explicit risk adjustment has been a controversial issue, PwC reported.
The new draft limits the permitted techniques to calculate this adjustment.
“The residual margin eliminates any initial gain on the contract. It is not subsequently re-measured but is released in a systematic way over the coverage period. Any initial loss on a contract is recognized immediately in profit or loss.”
The International Accounting Standards Board (IASB) has not yet proposed an effective date of implementation or whether the resultant standard will be available for early adoption. This is expected after Canadian insurers have transitioned to IFRS in 2011.