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Accounting Board Members Clash Over DAC Change

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Members of the Financial Accounting Standards Board have voted 4-3 to implement new rules that could require life and health insurers to cut billions of dollars from their book value.

The FASB members decided to stick with the original Jan. 1, 2007, effective date for the rules, rather than accepting a request from life insurers that FASB, Norwalk, Conn., postpone the effective date for at least a year.

The decision affects FASB support for implementation of Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts, a document issued by the American Institute of Certified Public Accountants, New York, in 2005.

SOP 05-1 tells insurers how they should handle accounting for “deferred acquisition costs,” or costs for bringing in new business that are spread out over the life of a policy, for policies that undergo “internal replacement.”

The SOP concerns instances in which a policyholder or insurer replaces an in-force policy with a new policy from the same insurer.

Groups such as the American Council of Life Insurers, Washington, have complained about many aspects of SOP 05-1 and the batches of guidance released to explain the SOP.

One of the biggest surprises in the guidance has had to do with guaranteed renewable group insurance products, such as group life products.

If the products really renew automatically, SOP 05-1 does not affect them, but insurers that look at customers’ experience and renegotiate rates when renewing group contracts will have to comply with the SOP, according to insurance accounting experts.

Analysts at Fox-Pitt, Kelton, New York, looked at results for 7 large U.S. life insurers and concluded that complying with all SOP 05-1 provisions, including the guaranteed renewable group life provision, could cost more than $2 billion for those companies alone.

The adjustments might not be as painful as they sound, because they would involve no cash outlays and the rating agencies appear to be excluding SOP 05-1 effects from rating decisions, the analysts write.

Leslie Seidman, a FASB member who joined the board after running a private financial reporting consulting firm, said she believed guidance the AICPA has developed concerning Statement of Position 05-1 is confusing, especially when it comes to application of SOP 05-1 to guaranteed renewable group life insurance contracts.

“It’s not in anyone’s best interest to have a rough implementation of a standard,” Seidman said.

Seidman was one of the most vigorous supporters of delaying implementation of part or all of SOP 05-1.

Thomas Linsmeier, an FASB member who is an accounting professor at Michigan State University, was one of the most outspoken opponents of delaying the effective date.

“People who didn’t like SOP 05-1 asked for implementation guidance, and then they tried to use the fact that they didn’t like the answers … to get us to defer the whole SOP,” Linsmeier said. “That’s disturbing.”

In the end, FASB members decided to implement all of SOP 05-1, effective Jan. 1, and return to the topic later if insurers appear to use the SOP differently.

A link to an audio recording of the SOP-05-1 hearing is on the Web at Document Link