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June 11, 2006 at 04:00 PM
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.
