The U.S. Financial Accounting Standards Board abandoned effortsto seek convergence with the International Accounting StandardsBoard on insurance contracts, and will instead focus on targetedimprovements to the existing U.S. GAAP insurance-accounting model,says Moody's Investors Service.

Moody's analyst Wallace Enman says in the ratings agency'sWeekly Credit Outlook that the FASB's decision is “negative” forglobal investors, but insurance associations supported themove.

Enman explains in the briefing, “For short-durationcontracts—primarily property and casualty insurance—the FASBdecided that its targeted improvements should focus only ondisclosure requirements; for long-duration contracts, such as lifeand annuity business, the targeted improvements will considerrecognition, measurement and disclosure.”

Previously, the FASB had sought convergence with the IASB'sefforts and issued a proposal last year that would have required accounting to be based on currentassumptions of cash flows to fulfill the coverage on a quarterlybasis, adjusted for the time value of money–even if the claims arenot being paid out for years. Furthermore, the proposal would haveapplied to all contracts that meet the definition of an insurancecontract, not just those written by insurance companies.

An Ernst & Young briefing notes that the FASB change indirection was “in response to feedback from constituents that anybenefits applying the proposed guidance to all contracts that met anew definition of an insurance contract would not outweigh the costof implementing it.”

Moody's also says there had been some disagreement between theFASB and the IASB regarding certain aspects of their accountingproposals.

“We have been supportive of efforts to develop a single set ofhigh-quality, globally applicable accounting standards forinsurance contracts,” Moody's says. “Inconsistency in accountingand reporting has long made it difficult to compare insurers withcross-border peers.”

The ratings agency therefore says the decision to abandonconvergence efforts “is negative for global investors because theywill not benefit from improved comparability of financialstatements of insurers reporting under U.S. GAAP and [InternationalFinancial Reporting Standards].”

The National Association of Mutual Insurance Companies calledthe FASB's decision a “major victory” for U.S. insurers. “For thepast year, we have forcefully advocated against changes to GAAPaccounting for insurance contracts that would deviate significantlyfrom current statutory accounting reporting requirements,” saysCharles Chamness, president and CEO of NAMIC. “GAAP are universallyrecognized as the gold standard in the world of accounting, andwe're obviously very pleased the FASB came to agree with us.”

Phillip Carson, associate general counsel and director offinancial regulatory policy for the American Insurance Association(AIA), says, “Rather than switching to a new model that our membersbelieve would have been unsuitable for property and casualtycontracts and that would be costly to implement without anoffsetting benefit, the FASB has today indicated a desire to onlymake improvements to the disclosures associated with the financialstatements of insurance products.”

In October, in a conference call on Ace Group's Q3 results,Chairman and CEO Evan Greenberg said of theFASB's previous effort to seek convergence with the IASB,“[W]hen I look at the changes that FASB is suggesting right now, Iget the theoretical, but that is divorced from practical realityand what investors really use to judge, and what management reallyuses to judge, one company to another or the health of acompany.”

He added, “The insurance accounting as it stands today has beenaround a long time, and it's been tested through all types ofenvironments, and it's reasonable. And I don't know what kind ofproblem we're trying to chase here by making changes.”