U.S. regulators and insurance trade groups need to focus on new international accounting and solvency standards that are being developed this year, according to an insurance consultant.
Mark Freedman, a principal based in the Philadelphia office of Ernst & Young's insurance and actuarial advisory services practice, said international accounting changes could be in place by 2012, and U.S. insurers need to begin thinking about these changes now.
Mr. Freedman points to several signs that U.S. generally accepted accounting procedures (GAAP) will eventually be replaced by new international standards.
He noted a recent vote by the Securities and Exchange Commission amending rules to allow foreign private issuers to submit financial statements without U.S. GAAP reconciliation; efforts by the International Accounting Standards Board to develop a new framework; and interest by the Financial Accounting Standards Board to participate in that effort.
With regard to the SEC comment, Mr. Freedman said that in the short term, U.S. companies have the option to convert to IFRS or to continue to use GAAP accounting.
But in the long term, "a fair value type of standard is a gigantic change." As a result of such a change, earnings could be a lot more volatile, he said.
And, according to Mr. Freedman, under the current exit value concept–a way to estimate current value–it would not be clear whether an insurer would make money, lose or break even on an insurance contract when it is first issued. However, under GAAP, a company would break even when first issued, he continued.
One piece of the current exit value projection is risk margin, according to Mr. Freedman.
Margin is one area of discussion that was raised during last month's winter meeting of the National Association of Insurance Commissioners in Houston. The Group of North American Insurance Enterprises, New York, delivered a report to regulators regarding the role of risk margin in the calculation of technical provisions. GNAIE commissioned Ernst & Young to compile the report.
Determination of the fair valuation of liabilities is a central component of solvency standards proposed by the European Commission (Solvency II) and the IAIS, according to GNAIE.
The report focuses on the practical implementation of the cost of capital method for estimating market value margins applicable to nonhedgeable insurance risks.
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