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Regulation and Compliance > Federal Regulation

Smaller World Requires More Efficient Accounting And Regulation

By Jim Connolly

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New York

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.

Instead, Shimpi continued, insurers should be mindful that “part of the value we provide is the ability to bear volatility.”

Shimpi also added that if there is a focus on the fair market value of liabilities on a balance sheet, then assets should also reflect fair market value.

Skipper said he believes that if volatility is actually created by embedded options in a product, then those results should be reflected in a companys accounting. There will be a movement away from contracts with strong guarantees and options, he predicted.

NYLIs Skinner, however, maintained that consumers want contract guarantees, and they will continue to be offered.

The push to offer global consumers the products they need highlighted another point made by the speakers: A more efficient regulatory system has to develop.

“State insurance regulation must catch up with changes overseas,” said L Charles (Friar) FitzGerald, an ACLI senior vice president and corporate secretary. “It is imperative to have a Washington presence to interact with the banking and securities industries.”

“Statutory insurance regulation is slowly, and I mean slowly, modernizing,” said the University of Georgias Skipper. Regulators can help by getting out of the way and not being a dam that slows the current of change, he said.

For instance, he said that to a certain extent, regulation can be handled by the market through rate and policy form regulation.

Although streamlining of regulation is a worthwhile goal, NYLIs Skinner cautioned that “in the absence of rules, regulators have tremendous discretionary power. You guess about what you can do and sometimes you learn that it is not the case.”

He said discretion could conceivably affect product approvals and consumer choice. As an example, he described a meeting with a group of foreign regulators to discuss a nonsmoker product. At the start of the meeting, he realized that all the regulators were smoking, he said.

Creating a system that is more flexible from regulatory, accounting and product development standpoints, is something that is needed and that the American Academy of Actuaries, Washington, continues to consider, according to David Sandberg, an attendee at the conference and a second vice president and corporate actuary with Allianz Life Insurance Company of North America, Minneapolis.

Sandberg headed up an AAA committee that sought to create a unified valuation system, the intent of which is to create a more flexible regulatory system.

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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