Bifurcation of insurance and reinsurance contracts separating those elements entailing risk transfer is not needed now, one ratings agency declared last week.
In a letter to the Financial Accounting Standards Board, Fitch Ratings Service said that overall it is satisfied with the current principles-based accounting and does not feel bifurcation is warranted for insurance contracts containing finite-risk elements.
The bifurcation effort came about as a result of well-publicized use by some primary and secondary reinsurers of finite policies that did not actually transfer risk, but were used primarily to manipulate financial reporting figures. (See NU, Sept. 4, pages 16 and 34.)
The National Association of Insurance Commissioners originally proposed separating those elements of a reinsurance contract that contain risk transfer from those that do not, in order to better determine if they qualify for the favorable tax treatment of an insurance contract.
But the NAIC has since dropped that proposal, and instead has required additional disclosure in regard to the risk transfer elements of finite reinsurance contracts.
Fitch said it found those requirements useful and would support expansion of them in the interest of greater transparency.
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