A regulatory panel working on international accounting standards for insurance has heard insurance industry representatives question many of the concepts on the drawing board.

The representatives' critique concerning valuation of liabilities and other proposals was made to a contracts subcommittee of the International Association of Insurance Supervisors, Basel, Switzerland, during last week's New York meeting of the National Association of Insurance Commissioners, Kansas City, Mo.

The IAIS is preparing input to the International Accounting Standards Board, London, as it develops international accounting standards.

Discussion at the subcommittee touched on the exit value of liability, as well as whether treatment for life insurers and property-casualty insurers should be separate.

Industry representatives say the issue is important because it will shape U.S. insurance accounting in the future and could add volatility to income statements.

The Financial Accounting Standards Board in Norwalk, Conn., could, at some point after those new standards are in place, incorporate some of those changes into generally accepted accounting procedures (GAAP) reporting. That, in turn, could impact U.S. statutory accounting, they contend.

The Group of North American Insurance Enterprises, New York, is trying to explain to the IAIS why separate life and non-life models are needed, according to Doug Barnert, GNAIE's executive director. GNAIE represents both life insurers and property-casualty insurers.

While the proposal for treatment of liabilities on the table can make sense for life insurers, it does not make sense for non-life companies because there are no predictable reserves, Mr. Barnert explained. A prediction can be made, he said, but from the perspective of an investor, it is important to know the full amount that needs to be set aside, he adds.

For life contracts, there are CARVM annuity mortality tables and CRVM life mortality tables for reserving, he said. “Mortality is more predictable than hurricanes,” he added. If a bet was to be made on predicting mortality and hurricane losses over the next 10 years, “who is more likely to win the bet?” he asks.

The proposed changes are important because companies would have to reset interest rates each quarter and any change reported through earnings, creating the possibility for volatility, according to Mr. Barnert.

The one non-life line of business where such liability treatment could be appropriate is in workers' compensation, he added. The reason, he explained, is that workers' comp has a predictable payout pattern with limits on what can be paid. It is not based on a tort liability system, Mr. Barnert added.

How the IAIS responds is important because of its potential impact on U.S. accounting standards, said Dave Snyder, vice president and assistant general counsel with the American Insurance Association, Washington.

If the project proceeds, it will be an effort that will result in a system based on European accounting, he added. Practices such as discounting liabilities are relatively new and are “untried and unproven” in the U.S., he continued.

Steve Broadie, vice president, financial legislation and regulation with the Property Casualty Insurers Association of America, Des Plaines, Ill., said once the matter is exposed by the IASB, the FASB might take up the issue.

But, according to Mr. Broadie, there is concern about what the transfer value of a liability is. “Is it the settlement value?” he asked, “or what would be paid to extinguish a liability?”

The problem with a transfer value equaling a settlement value, he explained, is that there is a limited market to which you can transfer that liability; in effect, an artificial price is being created. The obligation associated with a liability does not change, so valuing it should not change if it changes hands, he said.

At a minimum, companies should be monitoring this because of its impact on statutory accounting, according to Jim Olsen, PCI's director-insurance accounting and investments. It may not have an immediate impact, but this may very well impact statutory accounting in the future, he cautioned.

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