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Insurers, Analysts Take Cautious Stance on Insurance Proposal

December 3, 2013

The FASB’s insurance accounting project aims to shed light on the liabilities of a complex industry.At a public roundtable, many preparers, analysts, and auditors said the proposed changes for life insurers won’t simplify their accounting but instead introduce too much volatility to their financial statements.

Life insurers, auditors, and some securities analysts on December 2, 2013, expressed concerns about the FASB’s plan to overhaul accounting for insurance liabilities, saying the plan was too complex and would introduce false volatility to insurer financial statements.

The participants in a roundtable at the FASB’s headquarters in Norwalk, CT, agreed that accounting for insurance contracts needed a change, but questioned the path the FASB chose with the June release of Proposed Accounting Standards Update (ASU) No. 2013-290,Insurance Contracts (Topic 834.)

The proposal attempts to address a long-running criticism that analyzing insurer liabilities is like looking at a “black box.” Low interest rates that have slashed returns on insurers’ investments and market volatility have heightened the calls for reforming how insurers record liabilities—the payments they expect to make to customers.

The FASB plan calls on insurers to make updated assumptions about their liabilities every reporting period and report the effects of those changes in their income statements.

Insurers would be required to assess the time value of money, meaning companies must use a common financial calculation called discounting, which helps assess the value of future payouts in current dollars.To ensure that their calculations are correct, the insurers would update the discount rate every period.

Many insurers, particularly life insurance companies, have expressed concerns about the volatility this would introduce to their financial statements, with up-and-down swings needlessly turning off investors.

Much of the debate at the roundtable focused on this potential volatility.

“What this proposal would do is actually go too far and give us too many short-term updates from an analyst perspective, making analyzing insurance companies far more difficult,” said Alex Obaza, a credit analyst at T. Rowe Price Trust Co.

Angie Sanders, senior vice president and controller at Principal Financial Group, said the proposal would introduce too much noise in insurer financial statements.

“Some folks would criticize current GAAP because it’s not sensitive enough,” Sanders said. “But what we’re doing with this new model is making it too sensitive.”

Alan Zimmerman, global financial research coordinator at Macquarie Securities, was one of the few people to voice support about the proposal’s most controversial requirements, saying that he believed the changes capture the way insurers make money.

“I’m not uncomfortable with volatility,” he said. “I actually think the volatility reflects the underlying economics.”

U.S. GAAP has had several different insurance accounting standards in place for decades.The standards have been developed over the years to deal with new types of insurance products, and the introduction of each standard has introduced a new accounting method.

The FASB’s proposal whittles down the accounting methods to two—one for long-term contracts such as life insurance and another for short-term contracts such as theft and automobile policies.

In addition to discounting, the roundtable also covered the proposed standard’s disclosure requirements and the transition to its adoption.Some companies and analysts expressed concerns about the volume of disclosures the proposal asks for.

“I’m sure there’s some valuable information in there, but… you’re just going to kill analysts with the amount of paperwork we have to deal with,” Obaza said.

On transition, the FASB requires businesses to restate past financial results using the new, proposed accounting, in what is called retrospective adoption.Investors usually favor this method because it allows them the ability to accurately compare current and past financial performance.Companies usually say this method will take significant time and effort.

As expected, analysts and businesses expressed different views at the roundtable.

“This is by far the most important part of the whole new model because how a company sets transition is going to affect earnings for a decade,” Zimmerman said.

Yves Pinkowitz, president of Pacific Life Insurance Co., said he believed his company would spend $10 million to make the transition to the new standard because it would need to hire new employees and engage with its auditors more often.

Although international convergence wasn’t on the discussion agenda, many participants said they wanted the FASB to converge with the IASB, which has proposed a separate standard for insurance contracts.The two boards had been working together until 2012, when they decided that they were too far apart to come up with a joint standard.

If the FASB can’t converge with the IASB, it should pursue limited improvements to U.S. GAAP instead of forging ahead with an overhaul that does not please everyone, said Michael Monahan, senior director of accounting policy at the American Council of Life Insurers.

“If the boards are not going to converge, especially in the U.S., you’re going to see a lot of pressure on targeted improvements,” Monahan said.

As for next steps, the FASB’s research team said it was continuing to conduct field tests on the proposal, and it planned to begin the next round of discussions for the project in January.