Journal :: With Profits & Accounting Standards

Published: June 29, 2005
Author: Graham Dragon
Category: Back Office
Permalink: With Profits & Accounting Standards

The Accounting Standards Board published today its report to the Treasury on Financial Reporting for Life Assurance companies.

This is in response to the Equitable Life debacle, and the subsequent Penrose report. It follows publication of Financial Reporting Standard 27, which attempted to force insurance companies to be more open and clear about their With Profit funds.

FRS 27 applies to accounts with periods ending after 22nd December 2005, so it will be some time before we start to see the results in practice. There are also two major categories of insurance company that are not required to apply FRS 27:

? Smaller companies
? Companies that apply International Accounting Standards

It doesn?t seem to me that there would be many insurance companies in the void between these two categories and that would therefore have to apply the standard!

The Board has noted in today?s report, however, that all the major insurers and bancassurers have formally agreed to adopt the standard for accounting periods ending December 2004 and onwards, even though they are not required to adopt it even when it comes into force fully from the end of this year. It is therefore only the smaller insurance companies who are likely to continue publishing accounts that do not comply with the standard and that do not address at least some of the issues raised in the Penrose report.

This report by the Accounting Standards Board also comments on the fact that FRS 27 was a very hurried, knee jerk reaction to the Equitable Life affair, and that there are still many unresolved issues. The suggestion in the report is that it is likely to be many years before there are really satisfactory standards in place for life assurance financial reporting.

The ASB feels clearer and better reporting is required across the board, not just in respect of With Profit funds. However, it is particularly in the area of With Profits that policyholders need greater protection and more advance warning when things start to go wrong.

There has been a great deal of argument about the pros and cons of With Profit versus Unit Linked funds. I do not intend to be drawn into that argument here. This is an issue for each financial adviser to make his or her own decisions ? and many will continue to take a balanced view, considering With Profit funds suitable for certain types of client and not for others.

What is clear from today?s report, however, is that it will be a long time, if ever, before we can rely on an insurance company?s financial reporting when assessing the risk of a With Profit investment. We will all, therefore, need to continue taking great care when selecting With Profit funds for our clients.

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