Experts clashed here over whether proposed world insurance accounting standards would help, by making insurance financial statements easier to compare, or hurt, by imposing new fair value measurement rules on insurers.
The National Conference of Insurance Legislators, Troy, N.Y., held a panel discussion on international accounting standards proposals at the NCOIL spring meeting.
The International Accounting Standards Board, London, is developing a major update of insurance accounting rules, and the Financial Accounting Standards Board, Norwalk, Conn., is looking into the possibility of working with IASB to make U.S. insurance accounting rules more like the rules in effect in the rest of the world.
Wayne Upton, IASB research director, said here during the panel discussion that there is a growing sense that the “U.S. is becoming an outlier.”
“In the long term this is just not tenable,” Upton warned.
In addition to being expensive, the current world insurance accounting system is confusing, Upton said.
“The current system offers a distinct insider advantage in capital markets to some investors because they understand today’s system while others don’t,” Upton argued. “A new accounting system would offer greater comparability and, thus, a fairer system.”
Upton said the 3 building blocks of the new system would include an unbiased estimate of future cash flows, using assumptions a “market place participant” would make; the time value of money; and an attempt to reflect true risk.
Fair value would be determined by the exit value, or how much the holder of a security would have to pay to get out of it, Upton said.
Jerry de St. Paer, a vice president with American International Group Inc., New York, and chair of the Group of North American Insurance Enterprises, New York, warned against the proposed shift to fair value accounting.
“Including fair value, an untested method, could do very serious harm to the global insurance industry,” de St. Paer said.
De St. Paer cited the current sub-prime market crisis as an example of a “classic market disruption,” in which the value of some securities diminishes and even disappears because of illiquidity.
There is a “disconnect between the market value and the cash flows that mortgage securities continue to produce,” de St. Paer said.
In the real world, the fair value of a security does not always reflect true value, de St. Paer insisted.
A draft of the new accounting standards could surface by the end of 2009. If U.S. players do not react to the principles now being developed, then implementation may be the only thing left to comment on, de St. Paer warned.
The U.S. industry, state legislators and regulators need to get involved now, de St. Paer said.
De St. Paer praised members of NCOIL and of the National Association of Insurance Commissioners, Kansas City, Mo., for getting involved, and he urged that insurance commissioners participate even more in discussions of the standards.