The Future of Insurance Accounting

Article excerpt

Implications for the U.S. Insurance Business

One thing is certain in the accounting world: the move toward fanvalue accounting. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Boards (IASB) have signed a memorandum of understanding (the so-called Norwalk Agreement) in an effort to develop a single acceptable set of global accounting standards. These standards are gradually moving toward the principles of fair value accounting. In October 2008, the FASB decided to join the IASB' s insurance contract project where the IASB is taking the lead. While decision usefulness and relevance are the IASB' s main argument for applying fair value accounting to insurance contracts, professional organizations are challenging this, noting that a fair value model could result in irrelevant income volatility that may not reflect the underlying operating performance of the insurer.

Background

In 1997, an Insurance Steering Committee was set up by the International Accounting Standards Committee (IASC). In December 1999, an issues paper on insurance was published. Public comments on the issues paper were received, and a Draft Statement of Principles (DSOP) was developed in June 2001. The DSOP was not an official public document but was widely discussed within the insurance industry. In April 2001, the newly formed IASB replaced the IASC and took over the insurance accounting project In order to meet its 2005 deadline for certain European Union companies to transition to International Financial Reporting Standards (IFRS), the IASB project was split into two phases: Phase I led to the issuance of a temporary short version for insurance accounting (IFRS 4), because the development of a full standard was impossible before 2005. In developing IFRS 4, the IASB' s objective was to provide limited improvements focused mainly on the classification and disclosure of insurance contracts, and to eliminate certain broad diversity in practice that existed for the measurement of liabilities (e.g., elimination of catastrophe and equalization reserves that were allowed in certain countries). As part of Phase II, the IASB is now developing a more comprehensive fair valuebased insurance accounting standard that will cover all aspects of accounting for insurance contracts. As a first step, the IASB published a Discussion Paper (DP), "Preliminary Views on Insurance Contracts," in May 2007. An exposure draft and a final standard will follow.

The importance of IFRS cannot be underestimated. As financial markets become more global, the need to speak a common accounting language is increasing, and a growing number of countries around the world are adopting IFRS as dieir domestic accounting standards. It is also important to note that some of the largest insurance companies in the United States are foreignowned, and a common approach to insurance accounting is gaining momentum with the analyst and the investor groups both in the United States and worldwide.

The FASB is feeling the pressure. The Norwalk Agreement between the FASB and the IASB has led to a formal commitment to converge U.S. Generally Accepted Accounting Principles (GAAP) and IFRS. The SEC recently decided to accept IFRS for foreign companies listed on U.S. stock exchanges, and issued a concept release that could significantly expand the use of IFRS in the United States. It is only a matter of time before the impact of IFRS may be more strongly felt here. For this reason, it is obvious that U.S. companies should more actively participate in the international accounting standards-setting process. U.S. GAAP on insurance is mainly governed by SFAS 60, Accounting and Reporting by Insurance Enterprises; SFAS 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments; and SFAS 113, Accounting and Reporting for Reinsurance of Short-Duration and LongDuration Contracts. …