Comments on ED 5 Insurance Contracts（Nov. 7, 2003）
IASB's project on insurance contracts intends to introduce the concept of fair value accounting for insurance liabilities. It is expected to enhance the faithfulness and comparability of financial statements of insurers and usefulness for their policyholders, investors, etc. We believe that a resolution of practical issues such as the reliability of insurance liability measurement, cost-effectiveness, etc. is necessary.
This draft has been designed as an interim standard and will be applied in 2005 when the International Accounting Standard will be imposed on the EU nations and others. It basically permits insurers to use existing accounting practices, and it will not require major changes that may need to be reversed when the Board completes this project.
The Association considers it inappropriate to decide when to disclose fair value of insurance liability while the standard to measure fair value has not been completed with various practical issues to be discussed. In addition, careful consideration should be given so that the change in accounting practices may not be reversed and may not generate additional system costs when the Board completes the standard. The interim standard should be consistent with other existing accounting standards. From the above points of view, we submitted our comments. A summary of these comments is as follows.
1. Disclosure of Fair Value (effective as from 2006)
The draft requires insurers to disclose fair value of insurance liability on 31 December 2006 and thereafter. However, it is difficult for insurers to measure the fair value of their insurance liabilities in a reliable and comparable manner because there still remain unresolved practical issues on the measurement of fair value. Thus, the Association disagrees with the disclosure of fair value unless details of the measurement are established and enough time for preparation is taken.
2. Valuation Standard of Bonds Held to Back Insurance Contracts
While the draft temporarily allows the measurement of insurance liabilities at cost, IAS39 requires insurance companies, in principle, to measure their assets at market value. As a result, for example, while an interest rate hike decreases the carrying value of bonds held to back insurance contracts, the value of insurance liabilities on the balance sheet will remain unchanged. Inconsistent measurement of assets and liabilities causes the amount of net worth to fluctuate. This may mislead users of financial statements. For this reason, we request that bonds held to back insurance contracts be measured at cost during the period in which the interim standard measures insurance liabilities at cost.
3. Ban on Accounting Catastrophe Provisions as Liabilities
Although the draft basically permits insurers to use current accounting standards in each country, it prohibits catastrophe provisions accounting in liabilities. The Association disagrees with this treatment because there is no reason to prohibit catastrophe provisions in particular.
4. Definition of Insurance Contract
This exposure draft defines insurance contracts as 'contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) ....' in order to separate insurance contracts from financial instruments. But the definition of "significant insurance risk" is vague and may cause arbitrary classification of financial instrument or insurance contract. Thus, the Association requests that the words "significant insurance risk" in the definition of the insurance contract should be amended to "any insurance risk" in the interim standard.