Canadian life insurers concerned with new global accounting rules

TORONTO -- Canadian life insurers have “concerns” about the impact on capital levels of new global accounting standards released in draft form yesterday that appear to disrupt the matching on their balance sheets of long-term obligations with long-term investments.

The final rules will not come into affect until 2013, but Canadian life insurers will press their case to domestic politicians and regulators.

“We clearly have concerns,” said Frank Swedlove, president of the Canadian Life and Health Insurance Association. “We believe if the accounting rules are changed, it would create volatility in the books of [Canadian life] insurance companies.”

He said the International Accounting Standards Board, based in London, has set aside a four-month public consultation period which will give the insurance companies time to make their objections clear. He said he is also encouraged that there will be “field testing” of some proposals.

Canada’s accounting body, the Canadian Accounting Standards Boards, has indicated it will go along with the rules set by the London-based IASB.

The concerns from the insurance industry stem from the core issue that assets would no longer be tied to liabilities. Thus, rate swings could cause capital to be squeezed.

Capital levels are important to all banks and insurance companies because regulators use them to assess financial health. If capital levels are deemed to be insufficient, a company may be forced to raise more funds in less than optimal conditions.

When Canadian insurers raised concerns about the pending new rules this summer, industry players pointed out that adjustments could be made to follow a two-tier system in the United States and the United Kingdom that allows life insurers to use one set of rules for balance sheet accounting and another for calculating capital.

But Canada’s top financial regulator, the Office of the Superintendent of Financial Institutions, indicated it was too early to determine whether changes were required.

OSFI is in the midst of a review of the capital requirements for segregated fund guarantees, stemming from growing popularity of the segregated funds business at Canadian life insurers and some high-profile problems. A process aimed at regulating the capital requirements for new business is expected to reach the public consultation stage this fall, while changes to models for existing segregated fund guarantee exposures is not expected before 2013.

Financial Post

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