A Brit-U.S. Debate Over Insurance Accounting Standards

WASHINGTON--A panel of accounting experts at a meeting of state legislators agreed that the United States should be part of uniform world accounting standards but diverged on what they should include.

Their comments came during an international accounting session at the spring meeting of the National Conference of Insurance Legislators, here.

At issue are the pros and cons of proposed fair value insurance accounting standards being weighed by the International Accounting Standards Board (IASB), London, which could be taken up by the Financial Accounting Standards Board (FASB), Norwalk, Conn., as it weighs a joint convergence effort with the IASB.

While the issue may not feel urgent, it is, according to Jerry de St. Paer, a vice president with American International Group and chair of the Group of North American Insurance Enterprises, New York.

Mr. de St. Paer said, "Including fair value, an untested method, could do very serious harm to the global insurance industry."

He noted that an exposure draft for new accounting standards could be issued by the end of 2009, and cautioned that if the U.S. market doesn't weigh in on principles being developed, then implementation may be the only thing left to comment on.

The U.S. industry and state legislators and regulators need to get involved now, he urged. He commended legislators and regulators at the National Association of Insurance Commissioners, Kansas City, Mo., for their current involvement and urged even greater participation from insurance commissioners themselves.

Wayne Upton, director of research with the IASB, noted that there is a growing sense that the "U.S. is becoming an outlier, and in the long term this is just not tenable."

Mr. Upton said there would be additional expense of continuing to use U.S. Generally Accepted Accounting Procedures standards if the new international standards become the global norm.

Personally, he said, he believes "the current system offers a distinct insider advantage in capital markets to some investors because they understand today's system while others don't, and a new accounting system would offer greater comparability and, thus, a fairer system.

But Mr. de St. Paer used the current subprime market crisis to explain how the proposed future value changes could impact insurers.

He cited the subprime problem as a "classic market disruption," in which the value of some securities diminished and even disappeared because of illiquidity. But there is a "disconnect between the market value and the cash flows that mortgage securities continue to produce."

He went on to say that cash flow matters and the fair value of a security doesn't always reflect true value.

Mr. Upton said the proposed system has three building blocks:

o An unbiased estimate of future cash flows, using assumptions a "market place participant" would make.

o The time value of money.

o The attempt to reflect true risk.

Fair value would be determined by the exit value, or how much the holder of a security would have to pay to get out of it.

Mr. de St. Paer said that in the catastrophe market in Florida, the new fair value approach would reduce capacity and increase costs.

Insurers pay more than other industries, Mr. de St. Paer said. If modeling was required to determine the risk margins, more volatility would be created and costs would increase, he asserted.

But Mr. Upton disagreed, saying he "failed to see how accounting for loans affects capacity unless it hinders the ability to enter capital markets."

And, he added, "the new system would preserve the independence of the accounting setting process, which neither favors or disfavors one group over another."

Mr. de St. Paer warned that if the FASB adopted the IASB proposal as it is as part of the convergence product with IASB, both foreign-based and U.S. insurers might have to consider whether they list on foreign exchanges. Companies would need to weigh the cost of reporting under different sets of accounting requirements, he added.

Even as Mr. Upton and Mr. de St. Paer sparred over the merits of the new international accounting proposal, District of Columbia Insurance Commissioner Thomas Hampton detailed what a new principles-based reserving system in the U.S. will mean for life insurers.

Charging the current rules-based system as rigid, he said a new, more efficient system will enable companies to offer new products such as those that meet the growing need of consumers for regular streams of income. Currently, it takes a longer time to get products to market, he added.