Accounting changes could mean major headaches for international insurers.
Property-casualty insurers that follow international accounting standards could find themselves with a major accounting shift if a proposal by international regulators is adopted.
At risk is the elimination of the “available for sale” standard for fixed income investments, something the industry argues is required for insurers to properly account for and manage their bond-heavy investment portfolios.
“Both European and Japanese insurers are concerned about losing the ‘available for sale’ category,” says Doug Barnert, executive director of the Group of North American Insurance Enterprises. “It would cause a huge mismatch between assets and liabilities.”
The financial crisis of the past two years has caused accounting regulators to reexamine the practice of asset valuation.
Critics have charged that the methods used by banks and other financial services companies to value subprime and other risky investments contributed to the meltdown.
In response, accounting regulators have targeted the way financial services companies amortize the cost of fixed-income investments. The International Accounting Standards Board (ISB) has a proposal that would limit the “available for sale” method of accounting for equities.
This is a particular problem for insurers with huge fixed-income portfolios, which would then be subject to other methods of accounting that could require them to include gains and losses in current net income, Barnert explains.
“Insurers constantly balance their portfolios to satisfy claims, and losing the ‘available for sale’ category would show huge volatility in our earnings,” Barnert says.
The “available for sale” category was created so when an insurance company sold a fixed-income investment, any unrealized gains from period to period would be included in comprehensive income, Barnert adds.
The ISB is currently considering changes to the “available for sale” category that would be optional at the end of this year and required after 2012, according to public statements.
Barnert says the insurance industry is hopeful that it may gain an exemption to the proposed changes, but adds regulators are acting quickly.
“We know a little bit more every day,” Barnert says. “Every two or three days we need to think about something.”
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