State insurance regulators may break away from the accounting rule crowd and adopt their own rules for life insurers that offer variable annuities with guaranteed benefits.
The change could affect what a life insurer has to say when the value of a derivative contract goes up or down.
An accounting rule team at the National Association of Insurance Commissioners will be talking about the proposed change Saturday, in Boston, at the NAIC’s summer national meeting.
The American Council of Life Insurers (ACLI) is asking the NAIC to have the proposed change take effect Jan. 1, 2019.
State regulators say they want more time to work on the proposal.
The NAIC staffers working on the proposal are emphasizing that, if insurers end up using the proposed rules, those insurers will have to include explicit disclosures, to help regulators understand how the insurers’ financial reporting is different from what would normally be required by U.S. Generally Accepted Accounting Principles (GAAP), International Financial Report Standards (IFRS), or the NAIC’s Statutory Accounting Principles (SAP).
“The provisions proposed are significantly different from what is currently allowed under SAP, U.S. GAAP and IFRS,” the NAIC staffers write.
Derivative Accounting Basics
A derivative contract is a financial instrument designed to pay off when something, such as an interest rate benchmark, changes.
Life insurers often use derivatives contracts to meet VA benefits guarantees obligations.
If, for example, interest rates fall much more than a VA issuer expects, an interest-rate-based derivative contract could pay of. The insurer could use the cash to cover the cost of keeping withdrawal benefits at the minimum guaranteed level.
An arm of the NAIC, the Statutory Accounting Principles Working Group, has been working on an update of the accounting rules that apply when the value of an insurer’s VA hedging derivative goes up or down.
The Draft Guidance