Insurer Groups Push for Changes To Accounting Standards Proposal

"The letter supports the IASB's efforts, but points out significant problems raised by its approach to insurance issues," said Stephen W. Broadie, NAII assistant vice president, financial legislation and regulation.

The key stumbling block in the IASB draft is whether insurance company assets and liabilities should be measured based on what the IASB calls "fair value," which the NAII deems similar to market value.

Mark Freedman, a partner and actuary in the Philadelphia office of accounting firm Ernst & Young LLP, noted that a simple definition of fair-value accounting is valuing assets and liabilities at what you can sell them for. "This presents a problem with insurance company liabilities such as loss reserves, as there is really no ready market for them," Mr. Freedman pointed out.

While it is possible to develop a market value for loss reservessuch as when a loss portfolio transfer transaction is negotiatedit is a very time-intensive, labor-intensive and expensive calculation, Mr. Freedman indicated.

It is the volatility that will result from the change to fair-value accounting that insurers fear the most, according to Phil Arthur, a partner in Ernst & Youngs Toronto office. Volatility, he stressed, is not an attribute valued by Wall Street.

"Under fair-value accounting, asset values can change substantially with the movement of interest rates," Mr. Arthur said. Insurers are worried over how they will explain such dramatic changes to the public, as well as to investors and stock analysts."

"Because of the long-term nature of many insurers' assets and liabilities, and the enormous complexities involved in discounting insurance liabilities, this accounting model would mislead policyholders, potential customers, investors, regulators and others about a company's true value, according to NAIIs Mr. Broadie. "This problem is exacerbated by the apparent piecemeal approach presented in the exposure draft without a clear measurement objective for insurance contracts," he added.

Insurers are also concerned about the costs and long lead times of implementing the data-gathering and analysis systems they will require for a changeover to fair-value accounting, Ernst & Youngs Mr. Arthur added. "Many of the insurers basic assumptions related to the valuation of their assets and liabilities would significantly change," he noted.

Fair-value accounting is not favored by insurers, who are accustomed to managing their financial results on a totally different basis, Mr. Freedman added.

Nevertheless, fair-value accounting has achieved acceptance by some in the accounting profession as the best system for financial industry businesses.

For example, Mr. Arthur pointed out that fair-value accounting is used to value derivatives. "Some argue that it [fair-value accounting] makes sense for financial instruments," he said.

The IASB's adoption of accounting guidance will not affect U.S. regulatory insurance accounting, at least in the near term, Mr. Broadie of the NAII indicated. "But we are concerned about the apparent spread of fair-value accounting to areas in which we believe it is impractical and misleading."

Mr. Broadie went on to note that the IASB's draft calls for companies to disclose the fair value of their liabilities, without providing a mechanism for computing fair value, by Dec. 31, 2006. "This appears to indicate that the IASB, contrary to recent public assurances, is committed to fair-value insurance accounting, and we believe that this approach is misguided," Mr. Broadie said.

Mr. Arthur agreed that it will be difficult for insurers to comply with disclosure requirements without a clear definition of what fair value means in an insurance context.

"This lack of guidance by the IASB regarding fair value is one of the most controversial aspects of the Phase I proposal," he added.

Opposition to fair-value accounting is not limited to insurers. "Banks oppose fair-value accounting and have been as vocal about it as the insurance companies," said Mr. Freedman of Ernst & Young.

Other issues raised in the trade associations letter include the need for improvements in the IASB's due process procedures and the alleged inappropriateness of including reinsurance accounting guidance until it is part of a complete insurance accounting standard.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.