The National Association of Insurance Commissioners (NAIC) is weighing in on increasingly unpopular proposed financial statement accounting standards, saying proposed national and international accounting standards for insurance contracts would be bad for regulators’ ability to judge insurance companies’ balance sheets.
The International Accounting Standards Board (IASB) is leading a global effort to reassess the foundation of insurance accounting and its work is considered and implemented domestically by the Financial Accounting Standards Board (FASB), which put out a propsoal in June.
The key features of the new proposals, as put forth by Sandler O’Neill + Partners, an investment banking firm and broker-dealer, are their redefinition of the term “insurance contract” based on the characteristics of the instrument rather than the identity of the issuer; the scope of the proposals, which would extend to issuers other than insurers, including banks; and the fair value measurement of insurance contracts, which would be recognized in a combination of net income or other comprehensive income, noted Sandler O‘Neill.
U.S. state regulators currently use U.S. GAAP financial statements to evaluate the consolidated positions of insurance company groups.
U.S. regulators agree with prohibiting immediate gain recognition for all insurance contracts, regardless if the insurance contract is direct or assumed by the reporting entity and regardless if the risk is retained or ceded.
In a draft letter being prepared for FASB Chair Russell Golden, U.S. regulators are saying that although they continue to support a single, high-quality global standard for insurance contracts, the FASB and IASB proposals for such contracts don’t manage to do that because they would not result in “decision-useful information necessary for financial statement users.”
Moreover, the FASB’s proposal would jeopardize a comprehensive accounting and reporting system that has been in place for decades, and whose efficacy has been continuously validated over time in the face of extreme events and circumstances, alleged the draft letter prepared by the Statutory Accounting Principles Working Group (SAPWG) of the NAIC. This working group is responsible for the development and enhancement of Statements of Statutory Accounting Principles used by insurers in their statutory filings. It will host a conference call on the matter Oct. 23.
The NAIC is now joining in a fray that insurers from companies to trade associations, warned by institutional investors, have been vocal about for weeks now.
“The GAAP statements will be so convoluted that they will be worthless to investors and analysts,” says one regulatory accounting expert at a major insurer.
“People like to denote the ‘time value’ of money, but there is also the ‘time value, of usefulness.” People use financial statements to make decisions in a timely fashion. The standards, as proposed, will lengthen the time it takes to dissect the financial statements in order to arrive at even a cursory opinion about the financial strength of an insurance enterprise and its historical performance. The lengthened time frame will render the process useless so investors will turn to other areas where they will be able to make timely cogent decisions,” he warned.
FASB’s proposed accounting and reporting model is one that is largely untested, the SAPWG is writing. “The attempt to implement such an untested system would be extremely costly and time consuming for all insurers, but likely disproportionately so for the small and mid-sized companies, which compose the majority of insurance reporting entities,” argues the NAIC in its draft letter.
A spokeswoman for FASB noted it had not received the letter yet and does not comment on letters, but added, “I can say that the FASB will carefully consider input received from the NAIC and from other stakeholders as part of the due process we engage in before issuing a final standard.”
The new approaches has been controversial with investment bankers and institutional investors, as well as insurers, and the NAIC is voicing some of these concerns now.
This accounting for “current value” was rejected for banks on the grounds that measuring loans and deposits at “current value” is inconsistent with their business model and would not provide information that is decision-useful to investors, argues the NAIC.