Letter from... Brussels

If accountancy regulation for insurance were leaving the industry punch-drunk from a barrage of legislative proposals a year ago, 2004 saw the situation continuing, and now the outlook for 2005 and onwards looks like more of the same.

In Europe, insurance faces huge problems to upgrade and harmonise the rules for its accountancy. This is especially in its 'long-tail' sector, covering long-term life assurance, pension obligations and so on. It is especially here that national governments have each developed their own codes to safeguard the savings of their citizens.

Byzantine difficulties had inevitably developed against the challenge to harmonise rules across the EU 15. Knitting together more universal rules was not helped as the EU grew to 25 counties last year. However, in this industry, Europe needs to think in terms of more like 32 countries.

One has to include Switzerland, Norway and Turkey, and others, because they all come under the aegis of the European Insurance Federation, the CEA, or Comité Européen des Assurances.

It was Alex Schaub, the European Commission's director-general for the internal market, who sympathised with the legislative bombardment on the industry. However, the reasons for it are compelling. The industry itself is enormous: the annual domestic premium income of CEA's members comes to 855bn euros (£620bn).

Even more impressive are its investments, which total over 5,000bn euros (£3,500bn) in the relevant economic zone, or roughly a half of the EU annual GDP. Insurance, along with banking, is one of the largest institutional investors. All this means that its solidity is highly relevant to the EU's Financial Services Action Plan (FSAP) of 2002. This is all part of a continuing programme to de-fragment Europe's capital markets. The aim is to reduce borrowing rates for industry in order to help Europe out of its lacklustre performance of economic growth.

The regulatory upheaval is against a background where Continental European insurance firms have traditionally had to follow conservative rules. Paul Rutteman, secretary-general of EFRAG (European Financial Advisory Group), which co-ordinates technical advice to the Commission's accountancy regulation committee, outlines how firms have been required to understate assets and overstate liabilities. Even buildings have had to be booked at historic cost rather than fair value, adds Rutteman.

In order to meet the immediate needs, insurance accounting is currently squaring itself up to two major reconstructions. One will define financial reporting for insurance contracts, or 'the Insurance Phase II' of IAS. Phase II will eventually replace the currently applied Phase I that has not radically shaken up traditional regulations.

The other is Solvency II, which will concern steps to harmonise capital requirements for insurance companies. It should be seen in parallel with Basel II, its equivalent for the banking sector.

However, the term 'squaring up' might not be fully appropriate. This is because of the lengthy time delays likely before fruition. Speaking at a recent CEA conference, Tom Jones, vice chairman of the International Accounting Standards Board, expressed pessimism over a speedy solution to completing IFRS 4. The challenge is solving the IAS 39 carve out issue caused by problems of resolving fair value and volatility. Official estimates for the timescale for this stage may be to somewhere around 2007, with some bystanders guessing that it could easily slip on also to 2010, or beyond.

As for Solvency II, while publication of a framework version is planned for this year, final resolution of this important financial support element could easily drag on for at least as long.

Some experts find the current situation to be lamentable. One to disagree is Karel van Hulle, who was recently catapulted from accountancy generally to the insurance hot seat at the European Commission. Speaking to accounting & business, he conceded that achieving upgrades would 'take some time'. However, he added: 'It does not mean that the insurance companies in Europe are not well regulated.'

Jeremy Woolfe is a journalist based in Brussels.