U.S. Insurers ask FASB to Reconsider Contract Models

North American insurers called on the Financial Accounting Standards Board (FASB) to consider two separate models for insurance contracts: one for short-duration non-life contracts and another for long-duration life contracts. The request relates to insurers’ investor concerns over proposed modifications to those accounting standards.

In a September 6 letter to FASB chairman Leslie Seidman, the Group of North American Insurance Enterprises (GNAIE) said investors are satisfied with the current measurement and reporting of short-duration non-life insurance contracts but generally oppose proposals to introduce explicit risk adjustments, discounting and new eligibility requirements.

According to the GNAIE, investors think the proposed changes would increase the non-economic volatility of reported results for reasons outside the control of management; make operating performance less comparable and understandable, or are otherwise necessary as no practice issues, such as modified eligibility requirements, currently exist.

"Investors believe the proposed modifications may result in the global insurance industry becoming less attractive as an investment thus causing the industry's cost of capital to rise," Kevin Spataro, chair, GNAIE Accounting Convergence Committee, said in the letter.

"This would have detrimental impacts not only on the global insurance industry, but also on the customers it serves, causing either higher prices or lack of availability of certain insurance products," he continued.

Spataro pointed out that GNAIE along with other representatives of the non-life insurance industry have called for separate models, one for short-duration non-life insurance contracts, and one for long-duration life insurance contracts.

In addition, he noted that investors, analysts and preparers around the globe agree that the underlying businesses of non-life and life insurers are fundamentally different.

"Therefore, requiring application of a single model for both short-duration and long-duration insurance contracts would produce information that is not comparable, understandable, decision-useful nor reflective of a high quality global account standard," he said.

Spataro observed that the current model in place in most of the world for short-duration non-life contracts does not include explicit risk adjustments or discounting; has proven extremely reliable in the decades it has been in place; has already achieved global implementation; promotes comparability; is understandable and is consistent with the business model of insurers who issue short-duration non-life insurance contracts.

"In short, it possesses all the key attributes of a high-quality global accounting standard," he said.

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