Seven major insurance trade associations have asked the International Accounting Association (IASB) to take another look at its Exposure Draft 5, Insurance Contracts, which is also referred to as Phase I of the Insurance Contract Accounting project.
The London-based IASB hopes to eventually standardize global accounting rules for publicly held companies. The standards would include financial accounting standards for insurance companies.
The National Association of Independent Insurers (NAII), American Council of Life Insurers (ACLI), the Austrian Insurance Association (VVO), the German Insurance Association (GDV), the Life Insurance Association of Japan (LIAJ), the National Association of Mutual Insurance Companies (NAMIC), and the Reinsurance Association of America (RAA) sent a letter to IASB on October 31 outlining their concerns.
The companies represent the United States, Japan and Europe and they are asking IASB to “limit the Phase I accounting guidance to distinguish insurance from other financial instruments and establish appropriate financial disclosures, leaving measurement issues for resolution during Phase II,” according to an NAII release. Phase I is scheduled to become effective January 1, 2005.
“The letter supports the IASB’s efforts, but points out significant problems raised by its approach to insurance issues,” said Stephen W. Broadie, NAII assistant vice president, financial legislation and regulation.
The seven insurance companies are particularly concerned with how insurance assets and liabilities will be valued—fair value or market value—under the proposed rule.
“Because of the long-term nature of many insurers’ assets and liabilities and the enormous complexities involved in discounting insurance liabilities, this accounting model would mislead policyholders, potential customers, investors, regulators and others about a company’s true value. This problem is exacerbated by the apparent piecemeal approach presented in the exposure draft without a clear measurement objective for insurance contracts,” Broadie said.
He added that the IASB’s accounting rules will not immediately impact U.S. regulatory insurance accounting. “But we are concerned about the apparent spread of fair value accounting to areas in which we believe it is impractical and misleading.” He noted that the IASB’s draft calls for companies to disclose the fair value of their liabilities, without providing a mechanism for computing fair value, by December 31, 2006. “This appears to indicate that the IASB, contrary to recent public assurances, is committed to fair value insurance accounting, and we believe that this approach is misguided,” Broadie said.
The letter also raised questions about the IASB’s due process and questioned whether it is appropriate for the board to include reinsurance accounting rules until the rest of the standard has been developed.