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Commenters Pan FASB Proposal To Split Risk Reporting

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Insurance and reinsurance company executives are criticizing a proposal by the Financial Accounting Standards Board that could require insurers to divide reporting of “insurance risk transfer” from “financial risk transfer” for products such as group life insurance.

FASB, Norwalk, Conn., issued an invitation for comments in May that suggested that it might deal with the controversy over “finite reinsurance,” or “financial reinsurance,” by requiring issuers of all insurance and reinsurance arrangements that transfer financial risk to treat the financial risk transfer component of a contract as a deposit and the insurance risk transfer component as insurance.

FASB noted at the time that the rules might apply to direct insurance policies that cover relatively easy-to-forecast risks, such as group life and group health contracts, as well as the finite reinsurance contracts that have been getting most of the attention.

Financial services companies, rating agencies and other organizations have submitted dozens of comments on the proposal to split, or “bifurcate,” insurance contract accounting.

Insurance company executives who have commented have called the proposal unworkable.

“Many reinsurance contracts contain risk-limiting features which are closely interlinked with risk-taking features,” writes Mark Swallow, chief accounting officer at Swiss Reinsurance Company, Zurich. “More complex insurance contracts will frequently include elements of profit sharing. This is often also the case in direct insurance… We believe that bifurcation would require judgments that are even more complex and subjective than the judgments made today.”

Instead of requiring insurers to apply deposit accounting to portions of insurance contracts, regulators should be more vigilant about applying existing reporting guidelines, Swallow writes.

Robert Prie, controller of Hartford Financial Services Group Inc., Hartford, argues that “imputed deposit accounting” should be applied only to finite reinsurance arrangements.

In general, “deposit accounting is not appropriate for a portion of a contract, unless a deposit component is contractually separate such as in the case of a funded deductible for a workers’ compensation policy or an investment fund in a universal life-type insurance policy,” Prie writes in his comment letter.

Robert Tarnok, vice president of the technical accounting services unit at MetLife Inc., says the idea of applying the split accounting rules to group insurance policies simply because they cover relatively predictable pools of risk would not work because, ultimately, even individual policies are part of large blocks of business.

“Insurance enterprises underwrite risk on a portfolio basis wherein risks are pooled,” Tarnok writes. “Since aggregation of contracts or risks could result in a deposit element, as in the case of group contracts and reinsurance contracts… individual contracts could also be deemed to have a certain deposit element in them.”

Julie Burke and Brian Schneider, insurance analysts in the Chicago office of Fitch Ratings, say FASB should focus on increasing disclosure rather than splitting accounting for insurance policies.

Burke and Schneider write about the importance of reining in abuses of finite reinsurance that distort financial statements, but they also defend some uses of the arrangements.

“An example of a legitimate use would be a cedant who believes its reserves are adequate and enters into a loss portfolio transfer merely to remove the effects of discontinued business from its financial statements, so that those statements only reflect ongoing business,” Burke and Schneider write. “This would differ from a cedant who already expects adverse loss development and enters into a loss portfolio transfer or an adverse loss development cover as a means to avoid its immediate recognition.”

Other buyers of legitimate finite reinsurance arrangements might include insurers that cannot find traditional reinsurance as a result of disruption in the reinsurance market, Burke and Schneider write.


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