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Panelists Mull Fair Value Proposal

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Efforts to bring U.S. and international insurance accounting standards closer together could create challenges for domestic insurers.

Rob Jones, a managing director at Standard & Poor’s, New York, issued that warning here during a recent panel discussion at an S&P insurance conference.

“There is a train coming down the tunnel, and it may be a freight train,” Jones said.

The changes could be especially challenging for smaller insurers, Jones said.

Much of the discussion at the S&P panel discussion focused on a request by the International Accounting Standards Board, London, for comments about the idea of requiring insurers to apply fair value accounting rules to their liabilities.

“Fair value accounting” rules require a company to use a market price for a balance sheet entry, where a market price is available, or an estimation of a market price based on the present value of expected cash flows, according to the European Central Bank.

Several conference panelists questioned the idea of applying fair value accounting principles to insurance liabilities.

One concern is the difficulty of using fair value accounting to account for theoretical exposures, said Steve Ader, an S&P director.

If a Miami company has to include exposure to an anticipated bad hurricane season in its financial statements, and that bad hurricane season never materializes, the financial statements will not be an accurate reflection of the company’s finances, Ader said.

Jerry de St. Paer, chairman of the Group of North American Insurance Enterprises, New York, said everyone starts with the same goal as IASB – creating a single set of principles-based accounting standards.

But fair value accounting does not represent the nature of the insurance business, de St. Paer said.

An insurer using the fair value approach would have to assume that it could sell contracts to a hypothetical insurer or a hypothetical business, de St. Paer said.

“Our view is that the only time there is a willing seller and a willing buyer is when that policy is sold, and the premium reflects [fair value],” de St. Paer said.

Mark Trench, a project manager with the Financial Accounting Standards Board, Norwalk, Conn., who noted that he was speaking solely for himself and not for FASB, said FASB may decide in the third quarter whether to participate in the IASB insurance contracts project.


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