FASB's proposal and several alternatives to the current standard are outlined in a 34-page request for comment on “Bifurcation of Insurance and Reinsurance Contracts for Financial Reporting.”

The seven-member FASB will make the final decision based on a staff recommendation and comments to the agency, but any changes prompted by the proposal would be years away if FASB follows its normal timetable for rules modification.

The proposal has created such concern within the industry that accounting specialists at companies and trade groups representing direct writers have talked about the issue and at one point were considering a joint response, according to Phillip Carson, a senior counsel at the American Insurance Association, in Washington, D.C.

Mr. Carson said, “There was some discussion about an industrywide comment, but we decided that it would have more impact if everyone filed their own comments.”

He noted this is not just a reinsurance issue, because the scope of the FASB request specifically states that it would cover both insurance and reinsurance.

The project would be directed at regulating areas of the insurance industry that are broader than those sectors that came under focus during investigations by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission of such firms as American International Group and ACE Limited.

“This covers more than NAIC [National Association of Insurance Commissioners] rules dealing with reinsurance,” Mr. Carson said. “This potentially would cover a lot of territory,” he explained.

The FASB proposal is designed to regulate finite insurance transactions that in some cases the authorities said were found to have involved no real transfer of risk.

In February, American International Group agreed to pay $1.64 billion to settle state and federal charges, including a complaint by the SEC that in December 2000 and March 2001 the insurer entered into two sham reinsurance transactions with Gen Re that had no economic substance but were designed to allow AIG to improperly add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001.

Industry representatives say their concern is that revamping of current standards based on the FASB outline might also change the way insurers have to report earnings, reserve for losses and even pay their taxes.

Steve Broadie, a vice president at Property Casualty Insurers Association of America, said, “We have opposed bifurcation because we don't think it will lead to greater comparability and transparency in financial statements.”

Mr. Broadie said the organization thinks that the risk transfer standard in FAS 113 and SSAP [Statement of Standard Accounting Practice] 62 “are principles-based standards, which the FASB has said is the direction they want to move toward, and the proposals we have seen for bifurcation we think would result in a much more rules-based approach.”

Joseph Sieverling, a senior vice president and director of financial services with the Reinsurance Association of America in Washington, said the RIA's concern about the proposal is that embedded in it is the notion “that the current accounting model is broken.”

Mr. Sieverling argued, “It is the RIA's view that the current General Accepted Accounting Principle, FAS 11, when properly applied, accurately reflects the economic substance of insurance and reinsurance contracts.”

The FASB proposal, Mr. Sieverling said, “by bifurcating insurance and reinsurance, is intended to improve the usefulness of this information. But we're not sure whether it will, and, in fact, we doubt that it will.”

Perhaps “it could improve some elements of reporting, but we are skeptical, because we believe the current model works very well,” he said.

Among events highlighting problems with finite reinsurance transactions was a decision by Max Re Ltd. in late May to restate its first quarter based on an internal accounting review.

Earlier this year, AIG and Ace Ltd. agreed to restate earnings because of questions by regulators of their finite-risk contracts.

In April authorities announced an $80 million settlement with ACE that detailed the company's use of improper finite reinsurance to bolster both its own financial results and those of clients.

“In at least six separate deals, ACE created the false appearance of risk transfer, utilizing methods such as secret side agreements to negate the wording of written contracts,” according to a document that was part of the settlement agreement.