Insurers Mull FASB Insurance Contracts Project

Insurance industry representatives are offering their initial take on how the Financial Accounting Standards Board should go about creating new accounting rules for insurance contracts.

The Norwalk, Conn.-based FASB recently asked for comment, due Nov. 16, which would help it decide whether to work on an insurance policy accounting project either on its own or with the International Accounting Standards Board, London.

Topics that FASB noted in its invitation include accounting for the time value of money and the “unbundling” of insurance components from financing components in insurance contracts.

Additionally, FASB hopes for comment on use of cash flow accounting for both short-duration and long-duration contracts, rather than the unearned premium method for short-duration contracts and the lock-in method for long-duration contracts.

The GNAIE supports the creation of an international standard for insurance contracts accounting and is “participating in the joint effort of the FASB and the IASB to converge standards, and this is an important part of that work,” according to Jerry de St. Paer, executive chairman for the Group of North American Insurance Enterprises and senior vice president-finance with insurer American International Group, both in New York.

One point that Mr. de St. Paer recently made during a presentation to the International Association of Insurance Supervisors of Basel, Switzerland, is that assigning value to an insurance liability assuming it is the amount that an insurer would expect to pay to a third party to transfer rights and obligations ignores the absence of efficient markets for most insurance liabilities.

Other points he made during the presentation include:

o A question on how policyholder dividends are accounted for in ways he said produce the “wrong value of future cash flows.”

o The unbundling of insurance policy liabilities.

GNAIE is representing the American Council of Life Insurers, Washington, on this issue, according to spokesman Whit Cornman.

Bill Boyd, financial regulation manager with the National Association of Mutual Insurance Companies in Indianapolis, noted that although mutual insurance companies file financial statements based on statutory accounting, the FASB often sets the pattern for matters of statutory accounting.

“It might be early for this review to take place,” according to Mr. Boyd, since “not all the mechanisms and considerations are in place.”

There are those in the international markets that would like to see this completed, but “they don't speak for all American business.”

Among the concerns he cites are the costs associated with the conversion to the new system and the lack of access of smaller business to world capital markets.

“It is not quite ripe for all American business to be subject to an international accounting standards setter,” Mr. Boyd said.

The FASB is weighing whether to participate with IASB on an insurance contracts project.

The FASB request is different from an IASB request for comment, according to Jim Olsen, director of insurance accounting and investments with the Property Casualty Insurers Association of America based in Des Plaines, Ill.

Both are soliciting comments due on Nov. 16, but the IASB is asking for specific comments while the FASB call for comment is focused on whether it should work with the IASB on the insurance contract paper, he added.

Among the specific issues that are under consideration with the IASB document is whether insurance liabilities should be fair-valued, he adds.

The questions the FASB raises for comment leave a “back door” for comment on the IASB project and ask what is a suitable starting point, according to Steve Braodie, vice president-financial legislation and regulation with PCI.

Mr. Olsen said “it might be a reasonable place to start, but is it a reasonable place to end?”