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G. Naga Sridhar

Hyderabad, Nov. 7 The insurance accounting in India needs to be made more transparent to instil confidence in a policy holder and to make the industry ready for adopting International Financial Reporting Standard (IFRS) 4 insurance contracts, according to experts.

A panel on insurance accounting set up by Institute of Chartered Accountants of India (ICAI) is currently hammering out a set of recommendations that can be forwarded to the Insurance Regulatory and Development Authority for consideration.

“The panel has already identified the need to change some key insurance accounting practices currently followed in the country and there is congruence on imparting more transparency for the benefit of policy holder and industry,” Mr Sunil Talati, President, ICAI, told Business Line here.

Some of the recommendations which are yet to be formalised are unbundling of deposit component in deposit linked insurance schemes, pruning of embedded derivative accounting (which consists of investment and derivative part) and adequate provisioning to know the liability adequacy of an insurance company, he said.

According to Mr C.A. Abhijit Bandyopadhyay, Central Council member and insurance accounting specialist at ICAI, the firms should segregate returns and assured sum in accounting in deposit-linked products. “Similarly, in embedded derivatives accounting, the derivative part should be independently found out,” he said.

Further, insurance companies’ accounting should provide enough scope to run a liability adequacy test. “As of now there is no proper provisioning to know the liability adequacy of an insurer. We are recommending that they should have a litmus test to reveal their financial health in a fashion similar to the capital adequacy ratio of banks,” Mr Bandyopadhyay said.

This could be of help to a prospective policy holder as it would help him/her to take a decision on taking a policy from a particular company, he said.

With a decade of opening up of insurance sector is to be completed by 2010, there is a possibility of some insurance companies going public which promises some kind of transparency to the customers. However, the panel is mooting a novel idea of suggesting that even unlisted insurance firms should come up with a public balance sheet as a white paper on the health of the firm.

“All these should be seen as a run up to the likely introduction of IFRS in India by 2010-11. We need to prepare as the European Union would be implementing them by 2007-08. This also augurs well for global interest in Indian insurance and the protection of policy holder,” Mr Talati said.

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