The proposed global insurance contracts accounting standard could have significant implications for insurers, but they may not achieve the level of transparency required, Swiss Re says.

In a report on the International Accounting Standards Board and Financial Accounting Standards Board plan, Swiss Re questions the effectiveness of the standards.

“The latest accounting proposals represent a significant departure from existing standards and could have major strategic implications for insurers,” the report says.

“While there is broad acceptance in the insurance industry about the overall thrust of the proposed reforms, considerable debate continues about key details of the proposals.”

There are three main areas of contention.

There is disagreement on the various components of liability valuation and how these should change over time.

Insurers also want to avoid differences in the way assets and liabilities are measured, and are lobbying for symmetric accounting treatment on both sides of the balance sheet.

Finally, there is concern the new measurement model will put more emphasis on changes in the value of assets and liabilities and the evolution of insurers’ risk exposure than on income realised during a particular period.

One of the report’s authors, Kulli Tamm, says insurers need methods to value their assets and liabilities while recognising associated revenue and expenses.

“At face value this would seem straightforward,” she says. “But in fact it raises significant questions concerning valuation and measurement.

“Although these issues are not unique to insurance they are arguably more acute than in many other industries.”

Ms Tamm says some insurance risks, such as motor, are easy to assess, but other insurance products “are very complex and their associated liabilities can extend during very long time periods, making valuation – and thus accounting – difficult”.

“To give long-term insurance guarantees a value, an insurer must consider not only the timing and size of the possible benefits but also the policyholder’s continued willingness to pay premiums.”

Ms Tamm warns the new standards may make insurers’ reported financial statements more volatile.

“This could unduly drive up insurers’ cost of capital and put them at a disadvantage compared with other industries.”

The two accounting boards are waiting for industry feedback on changes to the original insurance contracts draft. Swiss Re warns this will probably push the implementation date out to at least 2016.