Insurnce Accounting Rules
Canada’s finance minister and its banking and insurance regulator are urging the International Accounting Standards Board to back away from new rules that would damage this country’s life insurers, according to sources.
Ottawa’s decision to wade into global accounting rules is the latest example of the unusually united front that Canada’s financial institutions, government and regulator are presenting on the world stage in the wake of the financial crisis.
Both Julie Dickson, head of the Office of the Superintendent of Financial Institutions, and Finance Minister Jim Flaherty have sent letters to the IASB in support of the life insurance sector, sources say. The letters encourage the global body to look at possible negative consequences that proposed accounting changes could have on the life insurers.
A spokesman for OSFI said the regulator’s letter is not public. A spokeswoman for the minister of finance did not comment.
At issue are specific rules that would apply in the second phase of the International Financial Reporting Standards. The London-based IASB is expected to release a draft of those rules this summer.
The industry argues that potential changes would be particularly detrimental to life insurers in Canada, and the CEOs of Manulife Financial Corp. and Sun Life Financial Corp. have been actively and publicly campaigning against them.
“It would be difficult to maintain long term products,” said Yvon Charest, CEO of Quebec City-based Industrial Alliance, the country’s fourth-largest life insurer. “It has an impact not just on our results, it could impact Canadian citizens,” he said in an interview Tuesday.
While IFRS is supposed to make it easier to compare financial results of different companies, it would have the opposite impact on life insurers, he suggested. Under a potential IFRS rule that would impact interest rate assumptions, “our net income would be about seven times more volatile,” Mr. Charest said.
For example, Canadian financial institutions currently ensure that the time horizon of their assets matches their liabilities. For instance, if an insurer sells a 30-year annuity, it will match that with a similar term bond. The new rules threaten to separate the two sides of the balance sheet, so that assets and liabilities move separately, increasing volatility. The changes would impact how the companies calculate their long-term commitments, forcing them to use different interest rate assumptions that they say would be detrimental.
Proposed rules would also make it less attractive for insurers to buy as many long term bonds, either public or corporate, executives say. The industry has ensured that that fact hasn’t been lost on Canada’s policy-makers.
The life insurance sector holds $75-billion, or 14 per cent of all Canadian and provincial government bonds; $77-billion, or 13 per cent of all Canadian corporate bonds; and $82-billion, or 13 per cent of all mutual fund assets in the country, according to the Canadian Life and Health Insurance Association.
That association sent a letter to the IASB asking it to take more time to consider the issue and to delay the release of its draft rules. It deemed rules that are under consideration about interest rate assumptions to be “fundamentally flawed.”
The changes could impact the cost of capital for insurers in North America, forcing them to raise prices on their products, and there would be consequences for the capital markets, the industry association said.
“We are not suggesting that the new standard be equal to the existing Canadian standard, but instead that the concepts that are the strength of the Canadian model be considered,” it said.
The Canadian Accounting Standards Board has said that Canada will adopt all IFRS guidelines, and will not pick and choose which rules it wants. Its position prompted the life insurers to seek help from Ottawa.
“It is guaranteed with standard setting that you will not please everybody,” Peter Martin, director of accounting standards at the Canadian board said Tuesday. He urged the industry to have patience with standard setters.
June 16, 2010 9:25 am 
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