* Changes could bring U.S. accounting closer to global rules
* Some insurers question costs, need for complex change
By Dena Aubin
NEW YORK, June 27 The biggest overhaul of
insurance accounting in 30 years will advance a step on Thursday
with the release of a proposal that some insurers fear could
make their profits more volatile.
In a move to align financial statements worldwide, the U.S.
Financial Accounting Standards Board (FASB) aims to shine a
light into what some call the "black box" of insurers' finances.
By proposing that insurers revalue policies each quarter and
recognize revenue later, FASB is trying to make insurers' books
more relevant and useful to investors.
The proposed FASB rule would require updating policies with
more current data on interest rates, mortality rates, frequency
of claims and the like. It would also require recognizing
revenue as coverage is provided, not when premiums are received.
FASB will seek comments through Oct. 25. The standard is not
likely to take effect before 2018, accounting experts said.
Investors are often wary of the insurance sector because of
its murky accounting and because some long-term policies can
make it difficult to estimate future profits and losses.
Future payouts to policy-holders are a huge uncertain
liability for insurers, which typically use prior years'
experience to figure out the costs of future claims.
The existing accounting standard has been in use for 30
years and some insurers are reluctant to make a costly switch,
accounting experts said.
"This will be very expensive to implement because it will
require new data to be collected and so many actuarial
forecasting models," said Donald Doran, a partner in
PricewaterhouseCoopers' insurance practice.
CONTROVERSY OVER INTEREST RATES
FASB has been working with the London-based International
Accounting Standards Board since 2009 to align insurance
FASB sets U.S. accounting rules, called generally accepted
accounting principles (GAAP). IASB sets international financial
reporting standards (IFRS), used in more than 100 countries. The
boards agree on many points but not on others, such as measuring
the riskiness of cash flows from insurance policies.
IASB will require a separate risk adjustment, reflected in
earnings, while FASB will not. IASB issued a separate proposal
on insurance accounting last week.(For details see )
FASB will monitor comments on IASB's proposal and seek a
more comparable standard, a spokeswoman for the board said.
One key disagreement is the impact of changing interest
rates on profits. Insurers have said that quarterly earnings
adjustments for interest rates would make earnings too volatile,
while being irrelevant for businesses with long-term contracts.
Seeking a compromise with insurers, FASB will propose that
interest rate changes not be reflected in earnings, but in a
catch-all "other comprehensive income" entry. But earnings would
still be more volatile than before because they will reflect
more current data in other areas, such as death rates and
claims' experience, accounting experts said.
COMPLEXITY, HIGHER COSTS FEARED
Some insurers complained that the compromise would make the
standard too complex. Property and casualty companies complained
the new standard is unsuitable for them.
"The proposals would result in the presentation of
information that users have communicated they do not want," a
group of non-life insurers said in a letter to FASB in November.
Interest rates are a major factor in many insurers' future
liabilities, which are "discounted" or reduced to come up with
their current value. The higher the interest rates are, the
bigger the discount and the lower the liabilities. That can have
a big impact on life insurers, whose coverage lasts many years.
Insurers currently use older interest rates to discount
liabilities, making liabilities appear lower than they would be
if the low rates prevailing now were used.
Rating agency Moody's Investors Service warned in December
that current accounting rules were masking the harm done to
insurers by low interest rates. The agency said it might
downgrade the credit ratings of multiple U.S. insurers if
current rates persist beyond 2015.