The European Union is expected to adopt International Financial Reporting Standards (IFRS) on a mandatory basis for all listed public companies beginning at midnight Dec. 31.

Currently, insurers operating internationally in Europe faces widely divergent accounting standards from different countries, which makes financial reporting a difficult task for multi-nationals.

IFRS have been developed by the E.U. in response to this problem, and together with U.S. Generally Accepted Accounting Procedures, are creating an international convergence in financial reporting, Swiss Re noted in its new study, titled "The Impact of IFRS on the Insurance Industry."

Rainer Helfenstein, senior economist at Swiss Re and co-author of the study, said that in the E.U., beginning next year most of the listed public insurers' financial assets will be reported at market values instead of at amortized costs, while keeping the treatment of liabilities unchanged.

Additionally, under IFRS, insurers will no longer be allowed to hold equalization reserves. As a result, Mr. Helfenstein forecast, earnings and capital of many insurance companies might become more volatile.

In some markets, Swiss Re also noted, property-casualty insurers have built up catastrophe and equalization reserves, which can be used against exceptionally large losses. But under IFRS, these reserves will no longer be allowed.

Exceptionally large losses will now directly hit equity capital, and this may lead to an increase in the volatility of earnings and capital, according to the Swiss Re report.