Insurance accounting is a unique challenge because insurance contracts assume an intangible risk in exchange for a real dollar premium. In most cases, premiums go directly to an insurer’s general account as a pool of funds to pay future claims. This is always true for Property and Casualty insurance and Health insurance too.
But things get complicated when life insurance and annuity investment products are used to grow funds for a rainy day or retirement. Unlike standard insurance premiums, deposits into insurance products like variable annuities and variable life insurance are kept separate from the general funds. In those separate accounts, policyholders may choose different investment options, take out policy loans and transfer dollars across different funds. But the success (or failure) of those investments can have a direct impact on the policy’s value as well as the guarantee risk assumed by the insurance company.
So insurers have set up special accounting treatments for general and separate accounts and the risk obligations that they support. But all of those complicated accounting arrangements will need to be revisited under the new approach accounting standard, IFRS. That’s the challenge as insurers work to make their accounting ‘wallpaper’ useful to Wall Street investors. Recently, CEB TowerGroup surveyed insurers on their future technology investments including critical life and annuity policy administration systems. Each of these systems will need to be adjusted for IFRS. Perhaps that explains why 44% of insurers will be increasing investments in policy administration.
The goal of convergence to the IFRS in the US is to provide an easy comparison between U.S. and foreign insurers (especially European). Ideally that would foster cross-border investment and more uniform solvency standards. But every ideal takes effort to attain, especially by a target date of 2015, although that may move out a bit.
With IFRS as well as solvency modernization for risk management, there’s a great deal of change coming to insurance financial systems going into 2015 and beyond. Thus these systems must be both agile and accurate. Recently CEB TowerGroup reviewed actuarial systems with flexibility, auditability and accuracy being key features. Those are exactly what insurers need to adjust to IFRS. For more information view the actuarial systems vendor review.