Thursday, June 10, 2010

Insurers Tell FASB Accounting Projects Have Them Frustrated

New York
Insurers expressed frustration and concern to a representative of the Financial Accounting Standards Board, Norwalk, Conn., during the annual insurance conference presented by Standard & Poor’s Corp., New York.

The concern is over an Insurance Contracts project that the FASB is currently working on and an exposure draft for financial instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities. The FASB projects could have a negative impact on both the insurance and life settlement industries.
During the session, Jerry de St. Paer, chairman of the Group of North American Insurance Enterprises, New York, said that there is still an opportunity to let the FASB know the major impact the disconnect between assets and liabilities will have on insurers’ balance sheets.

He pointed out the difficulty it would cause Canadian insurance groups who currently use a Canadian Asset-Liability model which does not use valuation based on fair value. The new model would result in not valuing assets and liabilities in conjunction, according to de St. Paer.

He also noted that certain bank products are allowed to use deferred acquisition costs and the capitalization of expenses but a 4-1 FASB Board vote disallowed the same treatment for insurers.

William Chrnelich, partner-assurance and business advisory services in the New York office of PricewaterhouseCoopers, said that a signed stack of insurance contracts represents revenue to insurers as well as the labor cost of getting agents to sell those contracts and that labor cost should be reflected in the cost of the contract. It is not an expense but a labor cost associated with completion of that sale, he added.

And, Craig Mense, executive vice president and CFO with CNA, Chicago, said that “We don’t think accounting for the property-casualty industry is broken, so don’t try and fix it.” It would make comparability harder for investors and shareholders, he added.

In response, Mark Trench, FASB project manager, explained that one of the issues with DAC is that it doesn’t meet the definition of an asset and that an attempt to define it as an asset “bothers the Board.”

In response, Chrnelich asked whether the Board was ready to go to Detroit and say that labor is not part of the cost of a car.

Trench said that “in this instance, the Board is not consistent.”

De St. Paer said that if the Board persists in this approach, it will create volatility which “will drive ROEs through the floor.” Consequently, “the cost of capital will almost certainly go up,” he added.

One audience participant asked which investors the Board had consulted in making its decision. Trench responded that FASB does have investment outreach and that investors have different perspectives on the issue. For instance, he said that if you talk to property-casualty insurers, they don’t want to change accounting treatment of claims and loss ratios. However, Trench continued, life insurance analysts in Europe say that current accounting is very opaque.

De St. Paer said that there has been endless talking to the FASB and the International Accounting Standards Board, London. He said told audience members what he told the Association of Insurance Financial Analysts, New York, several weeks ago: that in order to effect change an organized letter writing campaign is needed.

He said that the CFA Institute, Charlottesville, Va., is a strong proponent of fair market accounting and has been very organized about writing letters supporting the accounting change. He urged those in the insurance industry to do likewise to express concern over fair value accounting and the impact it could have on the insurance industry.

PricewaterhouseCoopers’ Chrnelich said that the changes would go beyond technical accounting but would impact executive compensation programs, how companies could compensate employees when there were losses while a company is growing its business and how the insurance industry interacts with the investment community. “Company control systems would have to change. The amount of change will be tremendous,” he said.

The FASB’s Trench said that if audience members wanted to speak out and didn’t have time to write a letter, the FASB has staff that would take their comments over the phone. He urged concerned attendees to call the FASB.

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