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Response to European Commission request for EFRAG endorsement advice on IFRS 9

Commenting on the European Commission’s request to the European Financial Reporting Advisory Group (EFRAG) for endorsement advice on the International Financial Reporting Standards (IFRS) 9, Insurance Europe’s deputy director general, Olav Jones, said:

“Insurance Europe welcomes the recognition of the needs of insurers in the EFRAG’s endorsement advice for IFRS 9, for Financial Instruments. There are, however, unresolved problems regarding the interaction of IFRS 9 and a new IFRS for insurance contracts, IFRS 4 Phase II, which the International Accounting Standards Board (IASB) is still developing. This means that Insurance Europe cannot support IFRS 9’s endorsement for mandatory use by insurers in Europe, until these problems are resolved in such a way that both IFRSs will work together.

“Insurers follow long-term asset and liability management strategies, and need consistent accounting requirements for financial instruments and insurance liabilities to show their financial performance coherently and in line with their business model. The IASB’s project for insurance contract accounting has not yet produced appropriate proposals, especially for participating contracts.

“As a result, insurers do not know how they will account for their liabilities. Nor will the resulting IFRS for insurance contracts be ready in time - the IASB has set its effective date for IFRS 9 as 2018, and yet insurers will need at least three years for implementation of the new IFRS for insurance contracts. This means insurers won’t be able to apply the two IFRSs together.

“It is currently not possible for insurers to assess fully the possible unintended consequences of the application of IFRS 9 until IFRS 4 Phase II is successfully completed. If insurers are forced to use IFRS 9 too early, or in conjunction with an inappropriate IFRS for insurance contracts, their financial performance may be distorted in their accounts. This may be difficult to explain, and there is a significant risk that investors will be misled. This would lead insurers to use non-GAAP performance reporting, the opposite result which the IASB project is designed to achieve.”

Published 15 December 2014