Insurers are assessing how a recent public comment draft paper on insurance contracts issued by the International Accounting Standards Board, London, will impact the insurance business in the U.S.
The topic of insurance contracts is also being examined by the Financial Accounting Standards Board, Norwalk, Conn., in an attempt to decide whether to make the effort a joint project with the IASB.
The IASB draft proposes guidance that incorporates a fair value approach to recognizing liabilities. IASB cites 3 building blocks to its proposal:
Explicit, unbiased, market-consistent, probability-weighted and current estimates of the contractual cash flows.
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Current market discount rates that adjust the estimated future cash flows for the time value of money.
An explicit and unbiased estimate of the margin that market participants require for bearing risk (a risk margin) and for providing other services, if any (a service margin).
Among the benefits that IASB says it believes will be accrued are:
Consistency with other International Financial Reporting Standards (IFRSs) that require current estimates of future cash flows in measuring non-financial liabilities and financial liabilities.
Clearer reporting of economic mismatches between insurance liabilities and related assets, and a reduction in accounting mismatches.
Consistency with observable current market prices, to the extent they are available. Such prices provide an understandable and credible benchmark for users, even though market prices are not available to support all inputs used in measuring insurance liabilities.
If FASB adds this to its agenda, then it will be a “revolution for insurance accounting,” says Doug Barnert, executive director of the Group of North American Insurance Enterprises, New York. GNAIE has been monitoring proposals that could impact international accounting requirements and impact both insurers’ international and domestic accounting.
Fair value impacts accounting measurement, deferred acquisition costs, classification of assets and liabilities as well as treatment of gains and losses, he notes. It is as important to accounting as the National Association of Insurance Commissioners’ development of a model investment law was to investments.