The International Accounting Standards Board is proposing that entities should use different methods for measuring life insurance policy assets and life settlement contract assets.
IASB, London, published a draft of a proposal for classifying and measuring financial assets and liabilities May 26.
Any standards adopted could eventually have an effect on U.S. accounting standards, because IASB and the Financial Accounting Standards Board, Norwalk, Conn., the organization that shapes U.S. private-sector accounting rules, are trying to make their rules more similar.
IASB wants to require that reporting entities measure most assets and liabilities at fair value.
IASB would let entities measure some other assets and liabilities, such as ordinary life insurance policies, using the investment method. Entities could value a policy at the purchase price, then subtract any policy payments.
IASB would require entities to measure “deposit-type and investment contracts of insurance and other entities to be measured at fair value,” and they also would require entities to measure life settlement contract assets at fair value, according to IASB.
IASB believes investments in life insurance contracts “should be excluded from the scope of the proposed guidance because the contracts have an insurance element,” officials write in the financial measurement draft. “Such contracts generally are purchased for funding purposes, for example, to fund deferred compensation agreements or postemployment death benefits, and the entity purchasing life insurance is either the owner or beneficiary of the contract.”
Measuring ordinary life insurance contracts at fair value might be difficult, IASB says.
IASB believes that “life settlement contracts do not have a direct insurance element,” officials write. “These contracts do not involve an insurable interest, and the investor is not a policyholder. The board decided that life settlement contracts should be included in the scope of the proposed guidance.”
Requiring entities to use fair value measurement in connection with life settlement contracts would, in effect, eliminate the option to use the investment method, IASB says.
Comments on the IASB draft are due Sept. 30.
Five insurance industry associations quickly responded to the release of the draft by asking IASB to reconsider its insurance-related recommendations.
The ad hoc coalition includes the Group of North American Insurance Enterprises, New York, an organization that represents North American life company chief financial officers, and the Asociacion de Aseguradores de Chile, Santiago, Chile, a group that represents life and property-casualty insurers in Chile.
Those groups and three property-casualty groups — 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 sent a comment letter to IASB and FASB.
“We are concerned with the potential loss of decision useful information that would accompany the migration to a single model for life and non-life insurance contracts,” the groups write in the letter. “We are equally concerned that the proposed single model is neither supported by established actuarial practice nor validated by empirical evidence, but is based instead largely on theoretical hypotheses.”
IASB should use an updated version of the existing accounting standard for non-life insurance contracts with a coverage period of 1 year or less,” the groups write.
One change should be that no explicit risk margins ought to be included in claim reserves, the groups write.