In a piece last week, Oliver Ralph of the FT says
Many insurers privately argue that the rules will fail to make accounts more comparable because insurance markets worldwide are fundamentally different. They say that the new standard simply imposes a huge burden on the industry in time, effort and expense, for little benefit.
I am sure they would privately argue that, but this is completely false.
The main difference between ‘insurance accounting’ and other kinds of accounting is the way insurance obligations are discounted at an arbitrary rate depending on the return of the assets. As Martin Taylor (then a chairman of the trustee board of WH Smith, now a member of the Bank’s Financial Policy Committee) commented
The actuarial convention that the composition of the assets should determine the size of the liabilities is ‘one of the weirdest emanations of the human mind. It’s a metaphor—like saying that the advent of jet planes made the Atlantic narrower—and metaphor has limited place in finance’.
Yes that’s weird, and of course the features of the backing assets, such as credit risk, market risk and so on have nothing whatsoever to do with insurance obligations.
But the really weird thing is how long the practice has survived. Nothing to do with what many insurers argue in private, I am sure.