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Iowa Offers New Indexed Product Accounting Option

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The Hawkeye State is giving life insurers that use derivatives to hedge indexed annuity and life operations more flexibility.

The Iowa Insurance Division has announced the accounting change in Bulletin 08-18.

The bulletin, which applies to life insurers with domiciles in Iowa, affects treatment of derivatives hedging of the growth in the amount of interest credited to holders of indexed life insurance policies and indexed annuities.

Insurers can use a procedure described in the bulletin to shift to the “amortized cost method” for accounting for hedging arrangements, and to “change the indexed annuity reserve calculation methodology such that index credit returns will be included in the reserve only after crediting to the policy,” officials write in the bulletin.

But insurers also can stick with their current accounting and financial statement presentation methods for indexed product hedging arrangements, officials write.

In 2006, Iowa regulators released a bulletin that called for insurers to record call option derivative assets used in hedging the interest credited at fair value in the summary of operations instead of recording them as a change in surplus, officials write.

To begin accounting for call option derivatives at amortized cost, an insurer must show that the derivatives qualify as economic hedges, officials write.

Index futures, swaps and other derivative instruments used to hedge changes in equity indices or other indices would still be accounted for at fair value, because an amortized cost does not exist, officials write.

To qualify for economic hedging treatment for a call option derivative, the insurer must document its risk management objective and strategy for undertaking the economic hedge, list the derivative instruments bought to hedge indexed insurance products, describe the nature of the risk being hedged, and explain how the performance of the hedging instrument will be measured, officials write.