AXA and the CFO Forum: gaining the confidence of investors

Denis Duverne, the AXA Management Board member in charge of finance, control and strategy

The perception by investors of insurance as a risky business is due in part to differences between the accounting methods used by various companies. The CFO Forum, which includes the chief financial officers of the leading European insurance firms, was created in order to improve the consistency, transparency and comparability of financial reporting by insurers. Denis Duverne, the AXA Management Board member in charge of finance, control and strategy, represents the Group on the CFO Forum. He explains what is at stake and the prospects for the future.

When and why was the CFO Forum initially formed?

It was originally proposed by AXA and formally came into being in 2002. The Forum brings together, for the first time ever as a single body, the chief financial officers of Europe's twenty leading insurance companies*. Its purpose is to contribute to the harmonization of accounting standards and financial reporting, in a manner consistent with the IASB** and the industry supervisory and regulatory authorities.

Today, accounting methods frequently vary from one company to the next because of differences in domestic laws and regulations. Financial statements fail to accurately reflect the true situation in the insurance business, because the International Financial Reporting Standards adopted in 2005 harmonize accounting rules which apply to the assets of insurance companies, not their liabilities, including the measurement of their obligations to the insureds. This lack of consistency is frequently perceived as an insufficient disclosure. Investors have difficulties reading the financial statements and understanding the sensitivity of insurance firms to market fluctuations and can be discouraged from investing in the sector, or else they do so only in return for higher premiums. This adversely affects the value of insurance company shares and makes it more expensive for them to borrow.

Our objective is therefore to improve the stability, consistency and transparency of the information we provide to investors, so as to enable them to invest with full confidence.

What are the shortcomings of current standards?

The obligation to apply the IASB's international standards starting in 2005 and the absence of a specific standard for the insurance contracts has forced publicly-traded European insurance companies such as AXA to comply with a temporary set of rules based on the continued application of local standards for most of their liabilities.

In spite of efforts made by AXA and others to provide the best possible information on that basis, the rules do not make it possible to give a true picture of an insurer's financial position and make that position more difficult to visualize.

For instance, accounting for insurance contracts has not been harmonized, so that financial data cannot be compared. Another problem comes from the fact that there is an accounting imbalance between the assets (measured at fair value, according to IFRS) and liabilities (generally accounted for at cost, in accordance with local methods). This imbalance can create an inaccurate picture in case of fluctuations in interest rates.

What solutions does the CFO Forum advocate?

The CFO Forum proposes that a single model be used for life and for property and casualty insurance. Its model is designed to reflect the reality of the insurance business. Income must be recognized as insurers are released from risks and as services are provided to insureds. The measurement method for insurance company liabilities is based on a risk-management approach and takes into consideration the assumptions made for setting premium rates.

This approach is consistent with market data: reserves are discounted at the risk-free interest rate applicable to the liabilities concerned; changes in the insureds' behavior is taken into account at the close of each period, options and guarantees are fully taken into account, etc. The model suggested by the CFO Forum makes it possible to ensure that assets and liabilities are measured in a consistent manner and that changes in their value are also consistently recognized in income and equity.

Lastly, the model is in line with the European Embedded Value (EEV) principles used by AXA in its public releases***, as well as entirely consistent with our Solvency II proposals, a fact that is of considerable importance at a time when the European authorities are revising the capital requirements of insurance companies.

The CFO Forum's proposals accordingly respond to the needs of users and provide solutions to all the shortcomings of the current model.

How far have things progressed and what are the next steps?

The IASB has been working for several years on standards for the insurance sector. The first stage of its project is expected to be completed at the end of the year, when a discussion paper is to be released. The aim is to issue standards for insurance companies in 2009 or 2010.

In this connection, the CFO Forum has made its proposals, known as the Elaborated Principles for an IFRS Phase II Insurance Accounting Model. The suggestions were initially submitted to the IASB to assist it and as a contribution to the proposed standards.

The principles were presented to the European public on June 22 in Brussels. It is important that the European authorities, which ultimately decide which IFRS are applicable in the European Union, endorse them. Likewise, we want to rally all of our stakeholders and are seeking the support of the authorities in the countries where the new standards will become applicable. That is why AXA - jointly with CNP****, which is also a member of the CFO Forum - has scheduled a meeting in Paris on July 25, with the supervisory and regulatory authorities, auditors, financial analysts and journalists. Other similar meetings have been or will be organized by CFO Forum members in the countries were they operate.

* The members of the CFO Forum are: AEGON, Allianz, Aviva, AXA, CNP, Fortis, Generali, Hannover Re, ING, Legal & General Group, Mapfre, Munich Re, Old Mutual, Prudential, Scottish Widows, Standard Life, Swiss Life, Swiss Re, Winterthur and Zurich Financial Services.

**International Accounting Standard Board, a private body that sets accounting standards for international financial reporting (IAS and IFRS).

***The CFO Forum has adopted the EEV principles. You can find out about them by clicking here.

**** France's leading personal insurance company.

You can access the CFO Forum website by clicking here (open a new window).