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Breaking Views: Insurers close ranks against fair value

Source: www.breakingviews.com is Europe's leading financial commentary service

Date: September 2003

By Christopher Hughes

After the spate of rights issues and dividend cuts that Europe's insurers have inflicted on shareholders over the past year, one might have thought the industry would be a little modest about its predictive powers. Not a bit of it. Insurers are fighting tooth and nail against new accounting rules that would limit their ability to manipulate or, in industry parlance, "smooth" their numbers.

These changes, they argue, will be detrimental to their business, and thus to the shareholder's interest.

The International Accounting Standards Board (IASB) wants to toughen the accounting rules for insurers in a move that could see the demise of the embedded-value method of calculating insurance profits that has dominated the industry in Europe for the past 20 or so years.

Accounts prepared on an embedded-value basis are effectively made up by the insurer itself, because it estimates the value of its own book of business. And while it discloses some of the assumptions it uses in reaching a value, it isn't easy for investors to replicate the calculation themselves.

Insurers make no bones about having used embedded value to smooth profits by twiddling the assumptions.

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