Just because its for insurance contracts, it doesn't mean it's not relevant to us all

May 2007 saw the publication of a substantial discussion paper by the International Accounting Standards Board (IASB)  -  preliminary views on insurance contracts.

If you don't work for an insurance company don't stop here - please read on. Despite the very focussed nature of this consultation exercise on insurance contracts, it's well worth a read.  It contains a lot of the IASB's most recent and unfettered thinking about a range of issues that are not just related to the insurance industry.

The comment deadline is 16 November 2007, so for a change, there is plenty of time to digest the proposals and do some independent thinking. So what elements of the proposals are relevant to people outside an insurance company? The following three areas are a selection of issues that could have a wider impact:

Customer contractual relationships
The preliminary view is that an insurance contract can be recognised as an asset even before renewal, or where no agreement to demand future premiums exists. In essence, this means circumstances where a customer has an economic incentive to continue the cover, rather than the insurer having an enforceable right to demand that future premiums are paid. Similar rights and obligations can be found in mobile phone and other contracts for utility services. What would justify these being accounted for using different principles?

Insurance liability measurement
The Board's initial conclusion is that all insurance contracts should be measured based on discounted, current estimates of cash flows that include a risk margin and service margin that would be demanded by market participants. Insurance contract liabilities are not unique and contain similar risks to other sorts of liabilities that companies have, such as warranty and litigation exposures. Why would insurance contract provisions be measured differently to similar non-financial liabilities?

Policyholder participation rights
The tentative conclusion in the paper is that a constructive obligation to pay cash to policyholders where there are "with profits" and similar arrangements should be recorded as a liability.  With profits contracts are not unique to the insurance industry. Similar arrangements exist elsewhere -- commonly in the form of participating preference shares -- and under current IFRS, we might classify these as equity. Why would we not extend the thinking in the insurance contracts paper to other capital instruments?

There are sure to be more parallels than this in such a comprehensive document - and for us non-insurance specialists its not too difficult to read. Let me know what you think by email or by commenting here.

Ian