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FASB Drops Bifurcation Proposal

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Members of the Financial Accounting Standards Board have given up on a controversial proposal to ask insurers and policyholders to split reporting for the risk transfer and financing components of insurance policies.

In a request for comments released in May, staff members at FASB, Norwalk, Conn., had suggested that the reporting split proposal, or “bifurcation” proposal, might apply to everyday products such as group life insurance and health insurance as well as to more controversial products, such as finite reinsurance arrangements, that have drawn regulators’ attention to insurance accounting rules.

FASB received 63 comments about the bifurcation proposal, and most commenters opposed bifurcation.

“They asserted bifurcation would be too costly, complex and arbitrary,” FASB officials report.

FASB members complained during a regular meeting that the commenters had misunderstood the intent of the bifurcation proposal.

The FASB staff was really trying to emphasize the difficulty of coming up with rules that can distinguish the fundamental characteristics of financial reinsurance from those of ordinary group life insurance, let alone from those of ordinary reinsurance, FASB members said, according to an audio recording of the meeting posted on the FASB Web site.

FASB members concluded that they still were sure how to set practical rules that insurers and others could use to distinguish financing components of insurance from risk transfer components.

Instead, FASB member said they hope to address finite reinsurance reporting concerns by updating current FASB rules that define reinsurance contracts as contracts that “involve significant transfer of insurance risk” and a “reasonable possibility that the reinsurer will realize a significant loss.”

FASB members also agreed that, although they are not going to require insurers and others to bifurcate reporting of insurance or reinsurance policies, it is legal for insurers and others that want to bifurcate policy financial reporting to do so.

Henry Siegel, chair of the financial reporting committee at the American Academy of Actuaries, Washington, is welcoming FASB’s decision to move towards a disclosure-based approach to finite reinsurance rather than altering the entire reporting basis for insurance liabilities.

“However, I believe that we have probably not seen the last of this issue,” Siegel says in a statement.

The International Accounting Standards Board, London, is preparing a discussion paper on accounting for insurance liabilities.

The IASB paper could deal with many of the same issues that FASB was trying to address in the May bifurcation proposal, Siegel says.


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