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Accounting Expert: Free Rate Guarantees in Jeopardy

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International efforts to update insurance accounting rules could be especially hard on providers of products that offer free interest rate guarantees.

The Financial Accounting Standards Board (FASB), Norwalk, Conn., has been trying to revise the Generally Accepted Accounting Practices (GAAP) that apply to insurers, both to reflect changing times and to reflect changes being considered by the International Accounting Standards Board (IASB), London.

Mark Freedman, a principal in the financial services office at Ernst & Young L.L.P., New York, Moneysays one proposed GAAP change could create a method for valuing the minimum interest guarantees provided by interest-sensitive products.

Today, GAAP rules do not require insurers to value the guarantees, Freedman says.

“In today’s low interest rate environment, any meaningful guarantees will cause substantial strain at issue,” Freedman says. “As a result, insurers will discontinue providing free interest rate guarantees.”

In theory, insurers could solve the problem by buying derivatives, but the risk that the insurers could face large collateral calls could make the cost of using derivatives in that fashion too expensive, Freedman says.

“Companies will be forced to accept and explain the volatility, unless they can find a way to hedge their liabilities by diversifying them with those in other product lines,” Freedman says.


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