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Recent SEC Proposal Should Be 'Wakeup Call' For Insurers

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U.S. insurers need to be more proactively involved in shaping future requirements, says one accounting expert in response to a recent proposed Securities and Exchange Commission rule that would exempt foreign private issuers from reconciling their financial statements with U.S. generally accepted accounting principles.

In a recent interview with National Underwriter, Mark Freedman, a principal with Ernst & Young Insurance and Actuarial Services, New York, said, “This is a wakeup call to insurers. The industry ought to consider the impact of where the U.S. is headed.”

Freedman was referring to a July 2 proposed regulation issued by the SEC titled, “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards without Reconciliation to U.S. GAAP.” The proposed rule requests comments by Sept. 24, 2007.

Both life and health and property-casualty insurers have been monitoring the activities of the International Accounting Standards Board, London, and the Financial Accounting Standards Board, Norwalk, Conn. Both of these organizations have put out requests for comment about ongoing work to converge accounting standards in order to make them more seamless internationally. The comment period for these groups ends Nov. 16, 2007.

Additionally, life and p-c trade groups have been voicing their concerns at quarterly meetings of the National Association of Insurance Commissioners, Kansas City, Mo.

Freedman says that the work of the IASB and the recent call for comment from the FASB about whether it should work with the IASB to create new standards in conjunction with the SEC proposed rule, is a sign of the direction that accounting regulators are taking.

Consequently, he says, U.S. insurance companies need to offer input and to prepare their own accounting operations for potential changes.

By 2010-2011, European companies and companies operating in Europe may be required to comport with changes being contemplated by the IASB.

At an absolute minimum, companies need 2 years’ lead time to get ready for such accounting changes, he continues, because they need to test the new requirements and compute results under the new system.

The impact can be major, according to both Freeman and representatives of all major life and property-casualty trade groups.

For instance, the impact of using fair value accounting would make it difficult to use asset-liability matching for life insurers and, according to insurers, create volatility on balance sheets.

Some products might become too volatile to offer, Freedman says. While some variable annuity riders are fair-valued, he says, others are not. Hedging could help, Freedman notes, but hedging is not a perfect process.

In a recent interview with National Underwriter, Doug Barnert, executive director of the Group of North American Insurance Enterprises, New York, cautioned that a fair value approach could affect accounting measurement, deferred acquisition costs, classification of assets and liabilities, and treatment of gains and losses. GNAIE has been representing the American Council of Life Insurers, Washington, on this issue.

Property-casualty trade groups including the American Insurance Association, Washington, the National Association of Mutual Insurance Companies, Indianapolis, and the Property Casualty Insurers Association of America, Des Plaines, Ill., have noted concerns ranging from the impact of creating risk margins, discounting and how the exit value of reserves is reached.

But in the body of its proposed regulation, the SEC explains why it considers the issue important.

It notes that the international financial reporting standards developed by the IASB are now used in almost 100 countries and “many other countries are replacing their national standards with IFRS.”

The SEC adds, “The Commission has long advocated reducing disparity between the accounting and disclosure practices of the United States and other countries as a means to facilitate cross-border capital formation while ensuring adequate disclosure for the protection of investors and the promotion of fair, orderly and efficient markets.”

The SEC also notes in its proposed rule that “…we believe that if robust processes for the joint development of high quality standards by the IASB and the FASB are in place, we need not delay considering the acceptance of financial statements that comply with IFRS as published by the IASB without reconciliation to U.S. GAAP.”