Problems with IFRS

When a company has long-term liabilities, they must be discounted properly to ensure they’re accurately reflected in the financial statements.

Insurers fall into that category, says Garry MacNicholas, senior vice-president and chief actuary at Canada Life. “Demographics and consumer needs make longer-tail insurance and retirement income a major component of life insurers’ business in many countries,” he told the 2012 Distributors’ Summit.

To facilitate consistent accounting of insurance across countries, the International Accounting Standards Board drafted International Financial Reporting Standards (IFRS) in 2010.

IFRS seeks to avoid such discrepancies, but doesn’t always jibe with the insurance business model.

“The proposed IFRS Phase II methodology for insurance delinks liabilities from their supporting assets,” saysMacNicholas. “So the market value of assets will fluctuate as spreads move; however, liabilities will not change in the same way.” This approach is flawed.

“It introduces sizable but largely meaningless volatility into life insurance financial reporting, raising significant concerns with investors and regulators,” he says.

“It also hampers the provision of long-term life insurance and annuity products. In turn, this will severely reduce insurers’ ability to make long-term investments.”

MacNicholas hopes IFRS will address these concerns. “Volatility is manageable if you are matched and discount consistently,” he says. “Unwarranted volatility is something IFRS is determined to avoid.” So far, he’s seen progress on:

• Discounting connected to the backing assets
• Interest-rate volatility going through the balance sheet rather than through P&L
• Considering the risk participation by policyholders

New proposals are expected later this year, and implementation won’t occur until at least 2015.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.