Is it really a small world, after all?
Executives say that in terms of insurance the world is getting there, and given that movement, it is important for accounting and regulatory systems to reflect the increasing integration.
“We need to establish common standards for global operations of our industry,” said David Skinner, CEO of the Asia regional office of New York Life International, Hong Kong. He spoke last month during a global financial forum sponsored by the American Council of Life Insurers, and A.T. Kearney, EDS, and Solcorp.
Streamlining accounting requirements is one way the global insurance market can become more seamless, speakers suggested.
For instance, reinsurance globally is treated as an asset on balance sheets, said Prakash Shimpi, president and CEO of Swiss Re Financial Services Corp. in New York.
However, in the United States, it appears on the income statement as an operating expense, he added. But, Shimpi reasoned, if a company did not have the reinsurance, it would need more capital. So, he continued, an argument could be made for treating it as an asset.
Since the reinsurance is not treated as an asset, if a company needed to make cost cuts, a CFO could justify cutting the expense item, even though in essence it is more than just an operating expense, Shimpi added.
As the insurance industry moves toward global convergence, there need to be accounting standards that better reflect accounting reality, said Harold Skipper, a professor of risk management and insurance and chair of the department of Risk Management and Insurance at Georgia State University.
As an example, Skipper noted the reporting of embedded options in life insurance contracts using fair market value accounting.
However, the issue of recognizing options such as guarantees in a contract, raises the issue of volatility and risk recognition in financial statements that would be created.
NYLIs Skinner said the volatility that could be created might necessitate increasing reserves.
But Shimpi added that it is preferable to have an accounting system that accounts for actual value even if there is some volatility. It is important to take a broader viewpoint that goes beyond the investor perception that volatility is bad, he added.