The Property Casualty Insurers Association of America's board has approved a set of principles to guide development of international accounting standards.
Jim Olsen, director of insurance accounting, said PCI opposed the “mark-to-model” basis that he believes the International Accounting Standards Board will support.
“Key to our approach is that property and casualty insurance accounting must reflect the way the insurance business is actually conducted,” Mr. Olsen said.
Under a “mark-to-model” approach, a company's liabilities are valued under a complicated formula involving variable factors such as inflation and risk of repayment.
Under the current valuation system, companies value their liabilities according to 100 percent of their present value, which Mr. Olsen said makes for greater consistency and comparability of liabilities.
Among the principles adopted:
o Different accounting standards are appropriate for property-casualty and for life insurers because of the fundamental differences between their insurance contracts.
o The total liabilities for a property-casualty insurance contract consist of pre-claim (unearned premium) and post-claim (loss and loss adjustment expenses) liabilities, each of which must be adequate to pay the expected obligations.
o Measurements related to property-casualty insurance contracts should be made on a portfolio basis to reflect the risk-sharing concept of insurance using accepted actuarial methodologies and the law of large numbers.
The Financial Accounting Standards Board and the International Accounting Standards Board have been working toward convergence of international accounting standards and U.S. Generally Accepted Accounting Principles for the past several years. The IASB is expected to release a “discussion paper” shortly, which summarizes the decisions it has reached in its project to develop a uniform international insurance contracts accounting standard.
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