FAS 133 Rules Could Impact EIA Insurers And Marketplace

FAS 133 Rules Could Impact EIA Insurers And Marketplace

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La Costa, Calif.

No one really intended FAS 133 to impact equity index annuity insurers adversely, but thats just what could happen, said Michael J. OConnor at a meeting here recently.

FAS 133the moniker for Statement of Financial Accounting Standards No. 133–is the new set of rules on accounting for derivatives under Generally Accepted Accounting Principals. Though the new rules apply to all types of United States companies, they particularly affect EIA insurers, putting them into a new reserving environment, said OConnor.

A consultant at Tillinghast-Towers Perrin in Minneapolis, Mn., OConnor made his remarks at the annual meeting of National Association for Indexed Annuities, Maryland Heights, Mo.

The Financial Accounting Standards Board has worked on developing the FAS 133 rules for several years, and companies were required to adopt them in the first quarter of 2001, he told National Underwriter in a separate interview.

The goal is to establish uniform practices on derivatives accounting across all industries, he said, explaining that there had previously been “tremendous divergence in this accounting.”

However, OConnor said, it may turn out that the new rules will create some problems for EIA insurersones that could affect product availability and insurance company staying power in the EIA marketplace.

Under FAS 133, he explained, insurers have to value a portion of their EIAs as a derivative (since index products link their credited interest to an equity index). But interpretations on how to do these valuations vary, he said, and since most insurers are not audited until year-end, uncertainty is continuing about how auditing firms will handle this.

In OConnors view, the rules have introduced a type of “disconnect” between economics and accounting for certain EIAs. “The problem is, how much of a product the company will say is a derivative,” he said.

“Say that an annual guarantee EIA has a premium of $100, and the insurer buys a hedge for $4 that will support this guarantee. The implication of FAS 133 is that the insurer may have to establish, say, a $20 reserve for the equity-linked portion of the EIA–even though the $4 option fully hedges the insurer,” he explained.

For EIA customers and agents, this presents no direct or immediate implications, OConnor said. But indirectly, it could have marketplace impact.