Life insurance accounting is a critical aspect that provides a detailed analysis of the financial status of an insurer. In order to provide a reliable assessment of the insurance company's financial standing, such accounting must abide by specific standards. For Australian life insurers, such a standard is the AASB 1038 Life Insurance Business.
The AASB 1038 incorporates accurate and reliable reporting of premiums, claims, asset valuation, assets and liabilities related to an insurer. Among these factors, the aspect of profit is quite unique in life insurance, which is adequately catered for in the AASB standard, since such profit can only be evaluated with regard to the all the services provided during the entire life of an insurance contract.
Purpose Of The AASB 1038 Standard
In order to effectively reflect the true financial state of an insurance company, the AASB 1038 standard aims to:
(i) Provide the most relevant methods in financial reporting for life insurance business.
(ii) Necessitate specific disclosures, which are instrumental in accurate financial reporting.
Features Of AASB 1038
In order to achieve its aims, the AASB 1038 applies various requirements to life insurance reporting. These requirements include:
(a) Such standards would apply to both insurers and the parent entities. This is a typical scenario that you may find in various companies, whereby an insurer may have a parent entity dealing with banking services.
(b) Both insurers and parent entities are required to provide full disclosure of liabilities, assets, expenses, revenues and equity; even if such aspects don't relate to policyholders or shareholders. Such a requirement is designed to provide a true picture of the financial status of the company in its financial report.
(c) Measurement of the assets of an insurer, reflected in its financial report, must reflect the net market value. Obviously, this would give a realistic assessment of the value of an insurer's resources.
(d) This standard prescribes specific parameters to be used in measuring policy liabilities. Such parameters cancel out the likelihood of distorting the actual value of a company's liabilities, perhaps to give a more favorable image than is truly the case. Moreover, insurers are required to measure such liabilities at net present values.
(e) This standard also applies specific requirements regarding insurers that are parent entities with subsidiaries. In this case, the insurer should provide full disclosure of any excess or deficiency in its subsidiaries. This means that the company's financial report will provide a separate assessment of the performance of both parent entity and subsidiary.
(f) Insurers must also provide a product-based separation of claims and premiums, with accurate detailing of revenue, expenses and changes in liability components. As you may realize, this has implications on tax deductibility aspects, which applies to particular insurance products, such as income protection insurance. This requirement wouldn't be applicable when the product-based separation isn't practical or components can't be reliably measured.
(g) If the company makes any returns in whatever kind of investment it has, such returns must be recognized as revenues. This has implications on assessing compliance by an insurer to requirements regarding the scope of its business interests.
(h) Various other specific disclosures are required in the financial report compiled by an insurer in compliance with this standard.
Making the best decision when choosing life coverage requires an in-depth understanding of how the personal insurance industry works. Kerrie Peacock offers useful insights that can help you make informed decisions. You can get professional advice from MeCovered. To get more insight on a cover that suits you, visit www.mecovered.com.au/life-insurance-accounting/.