The International Association of Insurance Supervisors has released a paper that could help shape a major update of world insurance accounting standards.

The IAIS paper is a response to efforts by the International Accounting Standards Board, London, to develop official international insurance accounting standards.

The IAIS suggests in a list of principles that insurers should try to anticipate policyholder reactions to all of a policy’s provisions under various conditions, not simply how policyholders might react to specific provisions in isolation.

The IAIS also recommends including embedded derivatives in valuations of insurance contracts; leaving the credit standing of an insurer out of valuations of insurance liabilities; and expensing the full cost of acquiring new policies when the policies take effect.

U.S. insurers often defer acquisition costs, then amortize a “DAC asset” over time.

Expensing acquisition costs immediately “may result in a negative liability as acquisition costs are fully expensed while future premiums include margins to cover them,” the IAIS says. “However, that result reflects the expected recovery of the acquisition costs that have been fully expensed.”

The IAIS paper could be important to players in the U.S. insurance market because it could influence the IASB, and the IASB is planning to start working with the Financial Accounting Standards Board, Norwalk, Conn., on a project to develop a new accounting standard for insurance, says Robert Esson, chair of the IAIS insurance contracts subcommittee.

The project would affect companies that file financial reports using U.S. Generally Accepted Accounting Principles as well as companies that use the International Financial Reporting Standards, Esson says.

The American Council of Life Insurers, Washington, has put out a statement welcoming the IAIS’s openness to public comments but criticizing some provisions of the final version of the paper.

“We feel that many of the accounting principles put forth in the paper contain untested and undefined procedures that need much more research and in-depth consideration,” the ACLI says in a statement.

Douglas Barnert, executive director of the Group of North American Insurance Enterprises, New York, a coalition of large insurers, says his group agrees with the IAIS on some points, such as the idea of leaving a company’s credit standing out of policy liability valuations.

The GNAIE also agrees with the IAIS about the idea that insurers should be able to account for an insurance contract as a single, unified instrument, without trying to split transfer of mortality risk, transfer of investment risk and other contract components in financial reports, Barnert says.

FASB recently suggested that it might like to see U.S. insurers split reporting for the “insurance risk transfer components” and “financing components” in some contracts, including group life and group health contracts.

But the GNAIE “strongly disagrees with both the IAIS and the IASB that a profit can be recognized as soon as a policy is issued,” Barnert says. “The industry believes that profits should be recognized only as insurance coverage is provided.”

Otherwise, companies could end up overstating current earnings, Barnert says.