Just as one man’s trash is another’s treasure, one company’s toxic asset may be another’s performing asset.
That’s the fear of The Group of North American Insurance Enterprises (GNAIE), an association that represents eighteen large insurance companies including life insurers, property/casualty insurers, and reinsurers. The Obama administration is soon expected to announce a plan to value toxic assets, and GMAIE is urging the administration not to use fair value accounting standards to do so.
The primary concern is that a broad-brush move by the U.S. Treasury or FDIC to impose fair value accounting standards on assets held by banks on their balance sheets will have unintended consequences for insurance companies, says Doug Barnet, Executive Director of GNAIE. “You have to be careful establishing a market in a fair value universe,” Barnet tells Insurance Networking News. “Once you determine the price, you become the price setter.”
Indeed, with the price of these assets set by fiat, internal auditors at insurance companies would have little choice but to follow suit, Barnet says. “A trillion dollars in assets is hard to ignore when you are establishing fair value and you have similar assets on your balance sheets,” he says. “We’re concerned that [insurance] companies that wouldn’t have marked these down before will be required by their auditors because of this transaction, so we’re urging caution. The worst-case scenario is that a bunch of insurance companies will have to take major capital hits on performing assets.”
In place of fair value accounting rules, GNAIE is urging a temporary migration to an amortized cost/incurred loss methodology in situations where markets are not “active, liquid or orderly.”
