NU Online News Service, Nov. 24, 2003, 8:39 p.m. EST – Some insurers are making announcements about charges that they expect to take once new accounting guidelines take effect.[@@]
The guidelines will apply mainly to variable annuities and variable life products.
Most insurance company executives contacted say the charges will not be significant. However, the executives note that the magnitude of the charges will depend on the types of contracts that a particular company writes.
The rules, which are included in Statement of Position 03-1, become effective Dec. 15. The SOP was developed by the American Institute of Certified Public Accountants, New York, and cleared by the Financial Accounting Standards Board, Norwalk, Conn. The new guidelines will apply at the beginning of an insurer’s fiscal year starting after the effective date.
The SOP addresses whether insurers should include information about the assets and liabilities associated with certain separate account insurance contracts in the insurers’ general accounts. The SOP also addresses whether related revenues and expenses should appear in the insurers’ income statements.
The SOP states that a separate account should be reported as a general account liability if it does not meet certain conditions. If an insurer wants to keep a separate account from becoming a general account liability:
1. The account must be legally recognized.
2. The account assets supporting the contract liabilities must be legally insulated from the general account liabilities.
3. The insurer must invest the contract holder’s funds within the separate account as directed by the contract holder in designated investment alternatives.
4. All investment performance, net of fees, must pass to the contract holder.
The SOP also offers reasons why, under certain conditions, an insurer must include a particular variable annuity in the general account.
For example, the SOP states that, because an insurer provides a fixed return for a specified period, a market value adjusted annuity written through a separate account does not meet the fourth standard and consequently must be treated as a general account contract.