Wednesday 12.02.2003 01:32 Uhr
Comment on improved IAS 32 and IAS 39 with respect to credit insurance contracts
The proposed amendment in IAS 39 paragraph 1f (Exposure Draft) suggests that financial guarantee contracts (including letters of credit and credit derivative default products) should be initially recognised and measured in accordance with IAS 39 and subsequently measured in accordance with IAS 37.
In our view, credit insurance contracts should be explicitly excluded from the scope of both, IAS 32 and IAS 39. Instead, the issue should be dealt with comprehensively in the future International Financial Reporting Standard (IFRS) on Insurance Contracts. The definition of „insurance contracts that principally involves the transfer of financial risk“ does not give sufficient guidance in order to determine which insurance contract may be excluded from the scope of IAS 32. Moreover, the use of two different IAS for initial recognition and subsequent measurement, as proposed in the amended IAS 39 paragraph 1f, may involve further difficulties. Neither IAS 32, nor IAS 39 nor IAS 37 do contain specific guidance with respect to the accounting for either insurance contracts in general, nor credit insurance in particular.
A comprehensive standard on the accounting for insurance contracts, including the accounting for credit insurance, would improve the comparability of financial statements and would benefit the investor with information that adequately reflects the underlying insurance products and services. In fact, credit insurance is an insurance product and should therefore be accounted for as an insurance contract. The following emphasizes the characteristics of credit insurance. These features distinguish credit insurance in particular from financial guarantees issued by banks.
· Credit insurance typically insures manufacturers and traders against the risk that the buyer does either not pay at all or pays very late. The contracts normally include a wide range of cover, depending on the specific circumstances. Credit insurance is often required by financing banks as an added security.
· The credit insurer does not normally offer a single risk cover, but covers the total of the receivables portfolio of its clients. As such the contract bears a statistical insurance risk. At the inception of the contract it is uncertain whether the specified future event will occur, when the event will occur, or how much the insurer will have to pay if the event occurs.
· Credit insurance contracts are not commonly traded on financial markets unlike financial instruments such as credit default swaps. The majority of the credit insurance risks are on small and medium sized companies on which credit guarantees are not traded in capital markets.
· Credit insurance is in itself specialised and different from products provided by banks. Financial guarantee contracts do not cover credit insurance contracts. While banks manage their financial guarantees on a single risk basis, credit insurers offer global coverage over a specified period with revolving amounts covered, as well as discretionary limits up to agreed amounts. The credit insurer does not know his exact exposure until a claim is made (statistical risk).
· The way issuers of credit insurance control the credit risk is very different from the way banks manage credit risk in a portfilio of financial guarantees. Whereas banks can provide unconditional on demand guarantees, credit insurance is always conditional. It is important to note that US GAAP recognise the conditionality of insurance contracts. A deviation from this approach should be avoided under IAS. It should be noted also, that, reinsurers explicitly exclude financial guarantees, as issued by banks, from their reinsurance contracts.
All these features of credit insurance meet the definition of an insurance contract. We therefore propose that credit insurance should explicitly be excluded from the scope of IAS 32 and IAS 39 and should be dealt with in the future IFRS on Insurance Contracts.
10. Oktober 2002