PWC: insurers under-valued by inconsistent financial reporting

Insurance analysts across the world believe that a lack of quality and consistency in current insurance reporting is increasingly leading to the under-valuation of a number of the world's leading insurance companies.

That was the finding of a survey, ‘Making sense of the numbers'' from Pricewaterhouse Coopers which compiled interviews with more than 40 investment professionals across Europe, the US, Asia and Australia.

It revealed widespread dissatisfaction with the current state of insurance financial reporting, with respondents calling for the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to come up with a new and improved reporting framework as quickly as possible.

Ian Dilks, global insurance leader, PWC, said: "Feedback from global insurance analysts is clear; they believe the current reporting situation is harming the insurance industry and they are calling for the IASB and the FASB to come to a conclusion, and quickly. The desire for a swift solution is especially strong among life insurance analysts using IFRS. Their views will be echoed by senior executives in many parts of the industry.

"The degree to which a consensus is emerging among analysts on the fundamentals that they believe should form the bedrock of the new reporting framework, is a significant step change. Consensus is rooted in a desire for reporting to reflect the economic reality of an insurer's business model.''

In terms of the future direction of financial reporting for insurance contracts, almost 90% of participants felt that insurance was distinctive enough to deserve its own reporting model.

Notably, this view was unanimous in the US.

Of those supporting a distinct model, over half (56%) would favour a separate approach for life and non-life business. Nearly 70% would like aspects of a particular contract that have different risk and earnings profiles, such as saving and investments services, to be accounted for separately, with the aim of clarifying exactly where the profits come from.

With regards to improvements in reporting since 2007, insurance analysts perceived cash flow information as potentially more useful than in 2007; a reflection of the current market environment.

However, a number of respondents expressed a high degree of frustration with today's cash flow data. Supplementary non-GAAP reporting was deemed highly useful, but largely inadequate. While many held Market Consistent Embedded Value (MCEV) to be theoretically more appealing than its predecessors, there was frustration with the consistency of its implementation.

The concept of ‘matching' (e.g. matching the recognition of acquisition costs and profit), is considered a key building block of a useful standard and receives strong support from respondents. This is contrary to the current proposals of the IASB.

Over 70% of participants would like to see an explicit risk margin used in the determination of insurance liabilities, primarily because ‘more information is better than less'. However, very few have experience of how the risk margin concept might work in practice.

Most participants also said they would support the continued use of multiple valuation bases. The quality of the associated disclosures of both cost and fair values was critical to many, as this would enable them to make their own adjustments.

The survey findings also reveal that 64% of respondents would like to see the proposed changes to financial instrument and insurance contract accounting adopted at the same time in order that it is presented and rolled out as one co-ordinated package.

However the remaining 36% felt that if insurers adopted the new financial instruments standard before the new insurance contracts standard, comparison with other financial sectors would be preserved.

Andrew Hill, partner, PricewaterhouseCoopers LLP, conlcuded: "As the IASB and FASB reach a decisive stage in their planned overhaul of insurance contract reporting, the survey findings offer the standard setters some clear messages.

"We recognise the scale of the challenge facing standard setters over the coming months and it is inevitable that some analysts, and indeed some insurers, will be disappointed by the board's final proposals. It is now essential that all sides engage in the debate and play an active part in achieving a practical and workable standard that meets the needs of the users of the financial statements."