The Financial Accounting Standards Board may require financial reports to show whether insurance contracts are financing vehicles rather than vehicles for transferring insurance risk.
The move comes in the aftermath of companies such as American International Group Inc. being hit with civil fraud actions for improperly accounting for transactions that authorities said were listed as finite reinsurance deals, when in fact they were loans.
FASB is looking into “bifurcating,” or splitting, contract reporting because of stories about some companies using “finite reinsurance” arrangements to dress up financial statements without actually transferring ordinary forms of insurable risk, such as the risk of dying or the risk of suffering from a catastrophic illness, the FASB said.
The National Association of Insurance Commissioners tabled a similar proposal last year at the behest of property-casualty insurers and reinsurers who felt separating risk transfer and financial elements of an insurance contract was not practical.
“Evaluation of whether a contract transfers sufficient risk ultimately boils down to professional judgment evaluating all terms of the contract,” said Joseph Sieverling, senior vice president of the Reinsurance Association of America. “The NAIC proposal does not increase the transparency and reliability of accounting for these contracts.”
Mr. Sieverling said the RAA has not yet taken a position on the FASB proposal. He noted that it was much broader in scope than the NAIC plan in that it addresses accounting by insurers, reinsurers and policyholders.
Steve Broadie of the Property Casualty Insurers Association of America said the NAIC proposal was a move away from standards-based accounting to one based on rules, which is in opposition to the general trend in the industry.
In addition, the industry is still digesting new chief executive officer attestation requirements regarding insurance contracts and side agreements and feels there should be some time to see if that solves the problem that has arisen in recent years regarding finite risk contracts.
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