NU Online News Service, Jan. 25, 1:56 p.m.EST

Proposed changes to insurance contract accounting will introducevolatility into financial statements, according to Standard &Poor's.

The International Accounting Standards Board (IASB) andFinancial Accounting Standards Board (FASB) published the proposedchanges last July and September, respectively.

A recent analysis from Standard & Poor's concludesthat "changes in interest rates could cause potentially significantswings in earnings and capital."

The ratings firm said that although its credit analysis focuseson the financial condition of a company regardless of accounting,changes like a new format for the balance sheet, income statementor disclosures "may bring to light information that we would needto consider in our analysis," S&P said.

Earlier this year, an investor's note from Sandler O'Neill &Partners said the proposed new standard would increase earningsvolatility. The firm said it preferred the current generallyaccepted accounting principles (GAAP) standards.

The IASB model "is an improvement to the current accounting forinsurance contracts," S&P said.

S&P went on to say that historical trend analysis could bedifficult and maybe impossible because the accounting changes are"so pervasive."

Users of the new accounting standards would recognize earlierwhen losses will occur and they will gain insight aboutmanagement's perception of risk, including how a company managesand mitigates risk, S&P said. This will allow users to "performpeer comparisons across insurers on their approach to managing andmitigating insurance risk," S&P noted, adding that it welcomesa common set of accounting standards for peer comparisons as globalratings agency.

Under the new model the income statement would no longer includepremiums, claims or expenses but will include a breakdown ofunderwriting margin, gains and losses, inception, changes inexperience, and changes in estimates, S&P said.

The IASB and FASB have a commitment to complete the insurancecontracts project by June 2011, with an effective date of 2013 or2014.

Though European insurers would benefit if the new accountingrequirements took effect at the same time as Solvency II at thestart of 2013, the same does not apply to U.S. insurers. Stateinsurance regulators oversee insurance companies, and regulatorshave no commitment to adopt a method like Solvency II, S&Psaid.