NAIC Requests Support by March 4 for ISAWG Proposal on Boundaries for Insurance Contracts

National Association of Insurance Commissioners (“NAIC”) International Solvency and Accounting Working Group (“ISAWG”) Chairman Ramon Calderon has advised that reaching an international consensus on accounting principles for contracts may be difficult to achieve. 

The NAIC believes that a principles-based solution is needed to resolve the issue of what cash flows should be evaluated in measuring the accounting treatment for an insurance contract. 

This issue is scheduled to be addressed at the International and Financial Accounting Standards Board (“IASB;” “FASB”) March 16, 2009 meeting, prior to which Chairman Calderon has asked ISAWG members, regulators and interested parties to indicate by March 4 whether they would support submission of the “Proposal on Contract Boundaries for Insurance Contracts” draft to the Joint Boards of the IASB and FASB as an NAIC Paper.  

The Proposal draft is attached for your review.

If a sufficient number of ISAWG members indicate their agreement (via email by March 4), the Proposal will be forwarded to the Chair of the Solvency Modernization Initiatives Task Force for approval and submission to the Joint Boards.

To register your agreement on the Proposal, please contact Rob Esson at the NAIC (REsson@naic.org) by March 4 if you would support its submission as an NAIC Paper.

A conference call to discuss the Proposal may be scheduled for Friday, March 6.

The complete text of Chairman Calderon’s memorandum on the Proposal is reprinted below.

 

Should you have any questions or comments, please contact Colodny Fass.

________________________________________________________________

URGENT – Request to approve a submission to the IASB & FASB by the NAIC on the Boundaries of Insurance Contracts

Sent on behalf of Ramon Calderon

To: International Solvency & Accounting Working Group

C:   Interested Regulators and Interested Parties

Over the last 8 months, I have been representing the US at the IAIS Insurance Contracts Subcommittee during its work on some principles on contract boundaries. While we had hoped to gain consensus internationally on a set of principles regarding contract boundaries, differences of opinion have emerged these last few days making consensus unattainable. Since this problem has occurred at the last moment, and if we believe that the value of our work performed thus far on this subject matter is beneficial, our comments would need to be sent to the Joint Boards (the International Accounting Standards Board – IASB and the Financial Accounting Standards Board – FASB) prior to the IASB’s considerations of the measurement of insurance contracts which is scheduled for the week of March 16, 2009.

The work at the Insurance Contracts Subcommittee has also benefited from input from industry, including US trades. In consultation with NAIC staff support and Chair of the IAIS Insurance Contracts Subcommittee, Rob Esson, we believe that the draft that had been intended to be presented to the IAIS Technical Committee next week had broad support not only from a number of members including myself, but also the US trades. I believe that it is important that these thoughts reach the Joint Boards, and propose to ask the ISAWG to approve the draft as an NAIC submission to the FASB and IASB. The attached draft has been rewritten as an NAIC submission, but is substantively the same as the IAIS draft.

The reasons why I believe that this is important are as follows:

The IASB has struggled with the issue of acquisition costs and pricing of long term life contracts. Some board members think that policy premiums beyond one year (for life) are the equivalent of ‘renewals’ and therefore don’t qualify for recognition as the ‘asset’ is outside the control of the company. The IASB has come up with a strange and perhaps artificial solution that requires an immediate write off of acquisition costs with the recognition of a “policyholder intangible asset” that might offset some of the new business strain – although how such an intangible asset would be measured is open to question. An alternative FOR GAAP PURPOSES, and that I believe is more consistent with the idea of evaluation of cash flows, is to not put any artificial constraints on the contractual cash flows that can be evaluated in the first building block (probability weighted cash flows), and allow adjustments for uncertainty surrounding those cash flows to be included in the margin (the third building block).

There is also a similar problem with policyholder dividends – the IASB believes that these are not liabilities and should not be included in the expected cash flows resulting in higher apparent profits that later become losses as the dividends are paid out. We have argued previously that if the Boards are going to use probability weighted cash flows, they should do so – not just use some cash flows.

The attached paper is designed to be a principles based answer to these issues that effectively says: Do you have a contract – if yes, measure all the cash flows relating to the contract on a probability weighted basis, and provides boundary conditions so that all the contractual cash flows of a long term life policy are brought into the initial calculation while preventing, e.g., p&c renewals being brought into the measurement.

I apologize for the late notice and urgency on this matter, but up until today we had thought that we could achieve an international consensus through the IAIS process. Due to the time constraints, I would like to ask the ISAWG members to let me know in the first instance whether you would support submission of the draft to the Joint Boards as an NAIC paper. If sufficient ISAWG members agree through an email process, we will forward the paper to the Chair of the Solvency Modernization Initiatives (EX) Task Force for approval and submission to the Joint Boards. Please let me know no later than Wednesday March 4 if you would support such a submission. As a fall back, we may be able to schedule a conference call Friday March 6 in the afternoon to discuss the paper.

Please feel free to contact either Rob Esson or myself. Rob will be travelling much of next week but should be available on email.

Sincerely

Ramon Calderon, Chair, International Solvency and Accounting Working Group

 

 

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