fasbAB.xml

If a life settlement company uses the fair value approach, it can use an estimate of the market value of the purchased policy.

FASB has set up a project to update the rules for estimating the fair value of life insurance policies in many different contexts, and it hopes to release those rules in a few months.

Some life settlement company executives told FASB in comment letters that they prefer the investment method because the lack of an active “tertiary” resale market for life insurance policies complicates efforts to estimate policy market values.

Board members decided at the latest meeting that a life settlement company ought to decide whether to use the fair value approach or the investment method on an item-by-item basis.

Board members also decided that life settlement companies should attribute cash flows associated with life policy transactions as the result of investment activities rather than as the result of operating activities.

Although some board members said they liked the idea of letting life settlement companies apply the new valuation rules to their 2005 financial statements, they emphasized the dangers of setting a troubling precedent.

In this case, FASB members said, life settlement companies would have an incentive to apply the investment method or the fair value approach to a specific life insurance policy based on knowledge about which approach would give the policy the higher current value.

In the past, “we have established the principle that we don’t want retrospective application where there is a potential for hindsight bias,” said Katherine Schipper, a FASB member who previously was a business professor at Duke University.

FASB members also talked about the importance of finding ways to protect life settlement companies from burdensome, redundant reporting requirements.

Leslie Seidman, a FASB member who managed her own accounting consulting firm, suggested that a company using the investment method should have to adjust policy valuations to reflect significant problems, such as deterioration in the condition of the company that issued a life policy or a major improvement in the life expectancy of the insured.

But a company should not have to make an active effort to seek out medical updates or adjust policy values to reflect fluctuations in interest rates, Seidman and other FASB members agreed.

Doug Head, executive director of the VLSAA, says his group is pleased with FASB efforts to replace the current focus on policy cash surrender values. “Anything is better than the current method,” Head says.