Geneva Association Publishes Study on Market Impact of Fair Value Accounting -- Impact of a Fair Value Financial Reporting System on Insurance Companies: A Survey

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by Gerry Dickinson and Patrick M. Liedtke (84 pages)

This second report to The Geneva Association's Accountancy Task Force provides an empirical analysis of the views of insurance companies on the likely impact that an international financial reporting standard based on a full fair value methodology, if it were to be introduced, would have on a number of their key corporate policy areas. The survey of a sample of leading international insurance companies and the follow-up interviews with CEOs, CFOs and other senior staff reveal a number of important issues:

First, no insurance company in the forty international insurance companies that participated in the survey currently uses a full fair value system as a general accounting model for internal planning and control, nor would any company wish to do so voluntarily.

Secondly, senior management in insurance companies consider that they would be under some pressure to change their internal accounting systems over time to realign them more with a new financial reporting system. This is in part to be consistent with investor and other user perceptions and in part because it would be costly and confusing to have two very different accounting systems running side by side.

Thirdly, the introduction of a full fair value reporting system would significantly change the business strategies, corporate policies and systems over time in a way that most companies consider would reduce their competitiveness.

Fourthly, there is a high degree of agreement that the higher volatility of reported earnings would increase the cost of capital of insurers and that it would be more difficult to provide earnings' forecasts or forward-looking information to the investment community.

Fifthly, most insurers consider that measuring the fair value of insurance liabilities (insurance contracts) would be very subjective and there might be compliance problems under the Sarbannes-Oxley Act.

Sixthly, a majority of companies perceive that the disclosure of fair values of insurance liabilities, even if they could be measured credibly, would be unlikely to increase the transparency of financial statements to users, but a significant minority, all outside of the United States, consider that it would increase transparency to some degree over the prevailing national
reporting standards. However, nearly all companies consider that this increase in transparency should be provided in the notes to the accounts rather than distorting the primary financial statements.

Seventhly, there is a broad consensus that a fair value reporting system would have some adverse impact on the risk transfer role that the insurance industry plays within the wider economic system.

The full report can be downloaded @ /media/lateststud/ga/