Accounting rules should let companies use a best estimate of future income and a discounting of the time value of money when valuing future rights associated with life insurance contracts.
Jerry de St. Paer, executive chairman of the Group of North American Insurance Enterprises, New York, presented that argument recently during a meeting of the International Association of Insurance Supervisors’ insurance contracts subcommittee in Basel, Switzerland.
The International Accounting Standards Board, London, and the Financial Accounting Standards Board, Norwalk, Conn., are working on a joint effort to reach a consensus on the valuation issue. The accounting bodies are expected to consider the issue later this month.
De St. Paer told the IAIS subcommittee that there is a movement away from the fair value approach.
In addition to having companies use future income estimates and discounting of time value, the rules should have present value used both for considerations and for obligations, de St. Paer said.
De St. Paer recommended that the expected costs and rights in a contract addressed in an insurance revenue recognition standard be re-measured regularly.
The proposed requirement differs from a requirement to value securities at fair value, according to Doug Barnert, GNAIE’s executive director.
Regular re-measurement would be done only when there was a substantial change in value, while fair value accounting of assets would have to be updated every quarter, Barnert says.
If a security is really in trouble, then its fair value should be reported, but, if a security is performing properly and is generating cash flows, then companies should not be required to report it at fair value, Barnert says.
External factors, such as the government deciding to value troubled securities at a much lower value than a company’s assets are being reported at, could result in a markdown, Barnert says.
Bank asset impairments have received the most attention, but fair value accounting rules also would affect the securities in insurers’ investment portfolios, Barnert says.
Meanwhile, in related news, GNAIE has asked the U.S. Securities and Exchange Commission to delay the approval of a memorandum of understanding proposed by the trustees of the International Accounting Standards Committee Foundation, London, concerning the creation of a monitoring group.
The monitoring group is supposed to ease interaction between the national and international authorities responsible for capital markets and the IASCF trustees.
GNAIE has written to the SEC that any such group should include a mechanism that regulatory agencies such as the SEC can use to meet due process requirements for setting international accounting standards; a process for reducing divergence in standards adopted globally; and a process for encouraging uniform enforcement of standards related to financial statements.
The GNAIE says the monitoring group also should operate as openly as possible, by making reports and other communications available to the public, having a formal public comment process, and letting members of the public attend its meetings.
Right now, the monitoring group would consist only of stakeholders interested in the needs of investors, GNAIE says.
The IASCF should consider adding representatives, either as members or as observers, from organizations such as the World Bank, Washington, and the IAIS, GNAIE says.