I have been traveling around the world for more than ten years. I have visited over 50 countries and met supervisors and industry professionals from 150 jurisdictions. When talking about a wide range of issues, including financial stability, accounting, solvency, governance, and market conduct, I found common issues as well as differences.
Most recently, one of the hottest topics is the volatility issue concerning long-term products. On this subject, I have been actively participating and presenting my views, which I would like to share in this editorial. While I officially represent the Japanese life insurance industry, my last name “OKUBO” consists of three Chinese characters , meaning “big, long-term, insurance,” I often feel like I am, in fact, representing the global long-term insurance business.
The proposed International Financial Reporting Standards 4 (IFRS 4) and the inappropriately designed economic solvency regime would bring tremendous volatility to companies with long-term insurance business models.
The scope of IFRS 4 Phase 2, as Deloitte states, is the treatment of liabilities insurance contracts. The aim is to achieve consistency in accounting and valuation of insurance & reinsurance contracts across companies, as well as to improve investors’ understanding of insurance companies’ profitability and financial position. These new rules are supposed to have synergize with Solvency II pertaining to the organization processes, systems and data of a company.
However, a possible outcome might be an unwanted shift toward short-term and investment-type products which transfer most risks to customers. Also, insurers may be driven to refrain from investing in assets other than fixed income assets, which may have a negative impact on the economy.
People may ask, “why do you continue to underwrite long-term protection products, facing so many challenges?” My answer is, “it’s not our choice, but our customers.”
We have earthquakes in Japan. We have typhoons. We don’t take vacations. But still our life expectancy in Japan is the longest in the world. Customers want long-term and stable insurance protection. As you know, Japan experienced a huge disaster last year. We are proud of supporting our people during this difficult time.