NU Online News Service, Sept. 11, 2:08 p.m. EDT

An International Accounting Standards Board proposal on how insurers should value their risks has drawn fire from an organization of major life and property & casualty insurance and reinsurance companies.

The critical comments by the Group of North American Insurance Enterprises (GNAIE) were sent to IASB in advance of the group’s Sept. 18 meeting, which is slated to consider the measurement basis for insurance contracts.

According to GNAIE, in developing an international accounting standard for insurance contracts, “IASB staff diverged from the more appropriate Contract Fulfillment Value approach supported by the coalition of insurers and the U.S. Financial Accounting Standards Board (FASB).”

Doug Barnert, the spokesman for GNAIE said under the concept favored by his organization “you put on books what you think your liability is going to be” based on the number of policies an insurer holds and actuarial estimates.

The IASB staff, he said, is favoring developing accounting based on immediate settlement or transfer of insurance obligations, which GNAIE says almost never occurs and is a largely theoretical concept.

IASB’s staff concept assumes, he said, that an insurer can sell its contracts to somebody else. But, in the United States, he noted there is not a free and open market to develop fair value and insurers are closely regulated by their insurance commissioner of domicile.

GNAIE favors a standard where an insurer will assess what they think they are going to pay policyholders. “Not what you think someone would pay to stand in your shoes and buy your claims from you.”

Mr. Barnert said the IASB has been divided on the issue in the past, and three years ago when the issue came up it was 7 to 6 with one abstention, and GNAIE was “very surprised when IASB came forward with “this theoretical hypothetical model.”

GNAIE Executive Chairman Jerry de St. Paer, in the letter sent Wednesday to IASB Chairman David Tweedie, said, “The IASB could take a significant step toward convergence of international accounting standards if it is able to reach the same conclusion that the FASB reaches for the measurement approach for insurance contracts.”

GNAIE pointed out that FASB’s approach is based on settlement with the policyholder pursuant to the terms of the insurance contract, including the service element of the contract and, therefore, is fundamentally different than a measurement approach that is based on immediate settlement or transfer of insurance obligations.

“GNAIE believes there are fundamental problems with attempting to measure insurance contracts using the pending IAS 37 approach, and those problems cannot be addressed as well in such a measurement approach as they could be in the CFV approach,” said Mr. de St. Paer.

He further noted that the FASB has tentatively agreed on the CFV approach. The letter pointed out that IASB staff has acknowledged that the FASB is unlikely to change this position, at least in the near term, and that it may be necessary to include both measurement approaches in the exposure draft on an insurance contracts standard if the IASB agrees with its staff recommendation.

In light of its concerns, “GNAIE respectfully asks the IASB to consider the issues that remain to be resolved in the IAS 37 project and the problems with attempting to apply such an approach to insurance contracts,” said Mr. De. St. Paer.

“GNAIE is optimistic that such consideration will lead to conclusions similar to those reached by the FASB and will be a significant step toward convergence of international accounting standards.”