Insurance Standard Proposals Are Fatally Flawed and Unworkable

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By Anne Rosivach

Speaking at the AICPA/IFRS Foundation Conference on International Financial Reporting Standardsin Boston recently, Jerry de St. Paer, executive chair, Group of North American Insurance Enterprises (GNAIE), said the current proposals and timelines advanced by the International Accounting Standards Board (IASB) contain fatal flaws that will introduce "significant non-economic volatility for long-duration life contracts and will obscure underwriting results for the property/casualty insurance business."

The insurance contracts standard is one of the projects the IASB and the Financial Accounting Standards Board (FASB) have been deliberating, with the goal of achieving a single converged standard; however, the two boards remain far apart on some issues. The IASB has moved more rapidly toward a final standard than the FASB, which has not yet issued an exposure draft for comment.

De St. Paer pointed out that the IASB "proposals affecting long-duration life insurance contracts do not reflect economic reality and results will be much less transparent to users." The IASB proposals do not differentiate between long- and short-term contracts; they are based on a single model for all insurance contracts.

In addition, de St. Paer noted that the FASB and investors do not support risk margins for short-duration property/casualty insurance contracts. At its May 2011 meeting, the FASB tentatively decided that the insurance contract measurement model should use a single margin rather than an explicit risk adjustment and residual margin.

De St. Paer went on to say that the overwhelming majority of investors do not support the introduction of discounting to the non-life measurement model. "Discounting mixes underwriting and investing and reduces the comparability and understandability of financial statements", he said.

The FASB has tentatively affirmed the proposal in the IASB exposure draft that the discount rate used to measure all insurance contracts should be a current rate that is updated at each reporting period (that is, not to lock in the discount rate for any insurance contract). They continue to address specific issues related to the application of the discount rate.

In his letter to Leslie Seidman, the FASB chairman, Kevin A. Spataro, chair of the GNAIE Accounting Convergence Committee, pointed to the potential impact of a single model for insurance contacts that does not recognize the fundamental differences between long- and short-term contracts. "Requiring application of a single model for both short-duration and long-duration insurance contracts would produce information that is not comparable, understandable, decision-useful, or reflective of a high-quality global account standard", he wrote. Both boards continue to discuss this issue.

De St. Paer said that even if these issues are resolved, there are too many outstanding decisions to assess the quality of the standard. "Analysts, investors, regulators as well as the insurance industry internationally continue to express their concerns with the process and direction of the development of this standard", he said.

He then urged standard setters to take a step back and assess the quality of the resulting financial statements, re-expose the IASB standard, and conduct field testing to allow users to understand the new measurement model.

The IASB has said it will review its exposure draft and may issue a revised draft in early 2012. The FASB does not plan to release an exposure draft for comment until 2012.

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