TORONTO — Canadian insurers could soon find it challenging to offer customers long-term coverage if proposed international accounting standards come into force without a few alterations, Sun Life Financial’s chief executive said Wednesday.
The new rules will bring changes to the way in which insurance companies calculate assets and liabilities that could make their finances appear more volatile and hamper the ability to raise the capital they need to back up long-term guarantees, Donald Stewart told reporters after the company’s annual general meeting in Toronto.
The answer, Stewart said, is to incorporate some elements of the current Canadian accounting system into a phase of the international regime set to be implemented in 2014.
“The unintended consequences would be that it would be very difficult for insurance companies to provide longer-term guarantees and since that’s at the core of what we do, that’s a fairly significant issue,” Stewart said.
“We believe that the fundamental principle that underlines the Canadian accounting system for life insurance companies is worthy of worldwide application.”
All Canadian companies are in the process of switching to International Financial Reporting Standards, which are intended to create a level playing field for financial statements from around the world. Sun Life (TSX:SLF) adopted the first phase of the new system in January and said it went smoothly. However, Stewart said he is very concerned about proposals contained in Phase II.
The current IFRS proposal sets to value liabilities — unpaid present and future claims — the same way as assets, using a “discount rate,” that makes estimates based current book values. Insurers and industry observers around the world have said that method allows for too many fluctuations and unknowns.
The International Accounting Standards Board has argued the proposed rules would lead to a more accurate reading of insurers’ balance sheets, which vary around the world.
Stewart said he believes the “significant” volatility that the new rules would bring to balance sheets is “a situation which is in no one’s interest”
“We in Canada have a regime in place that we have had since 1992 that has co-ordinated assets and liabilities and significantly stabilized these fluctuations that occur if you disconnect the assets from liabilities, which is what the IASB are proposing to do.”
“The closer we get to the principles of that system and the methodologies, the better we might be served.”
Stewart said the board made some promising moves towards addressing such concerns last year when IASB head Sir David Tweedie suggested the board did not have the proper formula and would revist the issue.
But since then, Stewart said, there has been much “toing and froing” among the board.
Sun Life (TSX:SLF), with $464 billion of assets under management, has operations in Canada, the United States, Europe and Asia and employs about 16,000 people, including some 7,000 in Canada.
Shares in the company rose 29 cents to $30.43 in morning trading on the Toronto Stock Exchange.