Leading U.S. life and property/casualty insurance and reinsurance companies and the four largest life insurance companies in Japan have jointly advanced a draft of basic insurance accounting principles that recognize the unique features of insurance contracts for consideration by the International Accounting Standards Board (IASB) Insurance Working Group.
The joint statement called the accounting principles, which are still under development, a foundation on which the insurance project could build. It was signed by the members of the Group of North American Insurance Enterprises, a trade association that focuses exclusively on financial reporting and accounting issues. The combination of US and Japanese life insurance companies represent more than 50 percent of the world’s life insurance markets.
In a July 22 letter to IASB chairman David Tweedie, the insurers wrote that they support the move toward a global accounting standard for insurance contracts. The group called for such standards to recognize several key principles:
· Entities should have the ability to measure assets and liabilities on a consistent basis, reflecting the ways companies manage risk and create symmetry in the measurement of assets and liabilities.
· Liabilities should reflect the inherent risk and uncertainty within insurance contracts, clarify the objective of providing an appropriate allowance for risk and uncertainty and not prescribe a single estimation technique.
· Non-life insurance claims liabilities should not be discounted with the exception of those liabilities that have highly predictable annuity-like payment patterns, such as workers compensation insurance.
· Life reserves should be calculated on a discounted basis.
· The assumptions underlying the measurement of insurance liabilities and intangible assets should be reviewed periodically and unlocked if appropriate.
· Liabilities should reflect the value of all financial options and guarantees.
· The credit standing of an entity should not be considered in the valuation of insurance liabilities.
· Measurement of insurance contracts should be based on the book of insurance contracts and not on individual contracts.
· There should be no gain or loss at initial measurement unless a recognition test indicates that the contract is loss-making.
· Profits should be recognized as they are released from risks, reflecting the fact that premiums are received in advance of the provision of insurance service.
Signatories to the letter include the member companies of GNAIE: ACE Ltd.; AIG, Inc.; The Allstate Corporation; GE Insurance Solutions; Genworth Financial, Inc; The Hartford; Liberty Mutual Group; Metropolitan Life Insurance Company; New York Life Insurance Company; Prudential Financial, Inc.; XL Capital, Ltd and the following Japanese insurers: Nippon Life Insurance Company; Dai-Ichi Life Insurance Company; Meiji Yasuda Life Insurance Company and Sumitomo Life Insurance Company.
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