Life insurers need to do a better job of explaining how they create value and earn profits, according to a new report by Swiss Re.

Milka Kirova, one of the authors of the report “Understanding Profitability in Life Insurance”, says most financial reporting is undertaken using standard international accounting practices.

But while the statutory accounting-based indicators provide a high-level picture of life insurers’ historical performance, she says they “fail to fully capture the long-term nature of life and health insurance operations”.

“Also, comparison across countries and companies is hampered due to differing rules and practices.”

Ms Kirova says there is limited disclosure of performance at the product level and few insights into a product’s risk profile and its consequences for future earnings.

“Also missing from accounting-based metrics is the cost of capital required to support the business,” she says. “These issues result in rather opaque profitability figures which make it difficult for stakeholders to truly understand and judge a company’s earnings and sustainability in the future.”

The report recommends life insurers use embedded value accounting that looks at quantifying future cashflows of products and the cost of capital for business lines with varying risk profiles.

Ms Kirova says embedded value accounting has not gained universal acceptance for external reporting to investors.

“In many cases top management make decisions based on embedded value concepts, while investors often rely on traditional accounting-based measures,” she says.

“A growing number of companies are developing and promoting their own performance metrics to supplement traditional accounting-based financial reporting.”

Mr Kirova says there is a danger such information can confuse stakeholders, but new accounting rules might clarify the bigger picture of how a life insurer is performing.

“In the future, insurance-specific accounting rules and new regulatory frameworks may also help to standardise financial reporting and make insurance profitability more accessible to all stakeholders,” she says.