U.S., Foreign Trade Groups Ask IASB to Revise Proposed Insurance Guidance

With the aim of reportedly aiding in the development of an international accounting standard for insurers, the National Association of Independent Insurers (NAII) and six other major insurance trade associations have asked the London-based International Accounting Standards Board (IASB) to amend its Exposure Draft 5, Insurance Contracts, also known as Phase I of the Insurance Contract Accounting project.

IASB’s ultimate object is to reportedly harmonize the accounting rules throughout the world for publicly-traded companies, which includes the financial accounting standards governing insurance companies.

NAII and other insurance trade associations from the United States, Japan and Europe sent a joint letter to the ISBA on Oct. 31 that addressed a wide range of issues. The seven trade organizations urged the 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. Phase I is scheduled to become effective Jan. 1, 2005.

“The letter supports the IASB’s efforts, but points out significant problems raised by its approach to insurance issues,” said Stephen Broadie, NAII assistant vice president, financial legislation and regulation.

One major issue throughout the process has reportedly been whether it makes sense to measure insurance assets and liabilities at fair value, which is similar to market value.

“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,” said Broadie.

The IASB’s adoption of accounting guidance will not reportedly affect U.S. regulatory insurance accounting, at least in the near term, Broadie commented. “But we are concerned about the apparent spread of fair value accounting to areas in which we believe it is impractical and misleading.” Broadie 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
Dec. 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, ” added Broadie.

Other issues raised by the trade associations include the need for improvements in the IASB’s due process and the reported inappropriateness of including reinsurance accounting guidance until it is part of a complete insurance accounting standard.

Topics Legislation