SEC Puts More Light On Traded Insurers' Reserves

Mr. Dailey said the SEC wants insurers to disclose the methodologies and assumptions underlying their reserve estimates and "to quantify what the amount of potential adjustment might be."

Insurers, under an SEC proposed rule governing critical accounting estimates, would have to explain how differing assumptions could impact their reserve numbers, he explained.

"They have to quantify it in dollars and cents," he said, where as in the past statements would deal with the question of variable reserves by stating they were subject to many unknowns and uncertainties, and that actual results could differ materially from estimates.

The two regulatory bodies, he explained, now want insurers to state that they believe there is a need for "X" million of dollars in reserve, but using different methodology and assumptions "it could be X-million-plus, so investors can see the potential variability."

"That is a sea change in disclosure requirements," Mr. Dailey declared.

In a recent 32-page report published by "Mealey Litigation News," a legal reporting service, Ms. Selznick and Mr. Dailey wrote that while the SEC rule is still under consideration, "its key provisions may already be required for insurers with a significant volume of long-tail policies."

It noted that in its most recent guidance on annual reports, the SEC said in part that "since critical accounting estimates and assumptions are based on estimates that are highly uncertain, a company should analyze their specific sensitivity to change, based on other outcomes that are reasonably likely to occur and would have a material effect."

They added that "companies should provide quantitative as well as qualitative disclosure when quantitative information is reasonably available and will provide material information for investors."

According to the analysis, "because reserves are the most important item on the financial statements of casualty insurers?representing about two-thirds of all liabilities?sensitivity analyses may already be required for long-tail writers, even though they are not currently mentioned in the SEC industry guide" for p-c insurers."

The NAIC has new disclosure rules effective this year for insurer annual reports to state regulators that require more commentary on the risks and uncertainties of their reserves, but that data is shielded from public view in a confidential actuarial opinion summary.

Actuaries succeeded in getting the NAIC to keep the information secret by convincing them it involved "significant proprietary information," according to the attorneys.

The SEC, in contrast, is asking for information despite opposition from insurer trade group representatives, who said the variable numbers would cause readers of financial statements to question their accuracy.