NEW YORK, Sept. 11 /PRNewswire/ -- An organization of major life and property/casualty insurance and reinsurance companies sharply criticized a new measurement approach for insurance contracts recommended by the staff of International Accounting Standards Board (IASB).

The Group of North American Insurance Enterprises (GNAIE) expressed disappointment that in developing an international accounting standard for insurance contracts, IASB staff diverged from the more appropriate Contract Fulfillment Value (CFV) approach supported by the coalition of insurers and the U.S. Financial Accounting Standards Board (FASB).

"The IASB could take a significant step toward convergence of international accounting standards if it is able to reach the same conclusion that the FASB reaches for the measurement approach for insurance contracts," GNAIE Executive Chairman Jerry de St. Paer said in a September 9 letter to IASB chair Sir David Tweedie. The IASB will be considering the measurement basis for insurance contracts at its September 18 meeting.

GNAIE pointed out that the CFV approach is based on settlement with the policyholder pursuant to the terms of the insurance contract, including the service element of the contract and, therefore, is fundamentally different than a measurement approach that is based on immediate settlement or transfer of insurance obligations which almost never occurs and is a largely theoretical concept.

Rather than supporting the preferred CFV approach, IASB staff is recommending a measurement approach that remains under development in the IASB's project to amend IAS 37, according to GNAIE. The insurance group also stressed that while recommending the IAS 37 approach, IASB staff did not address its basic flaws.

"GNAIE believes there are fundamental problems with attempting to measure insurance contracts using the pending IAS 37 approach, and those problems cannot be addressed as well in such a measurement approach as they could be in the CFV approach," said de St. Paer.

He further noted that the FASB has tentatively agreed on the CFV approach. The letter pointed out that IASB staff has acknowledged that the FASB is unlikely to change this position, at least in the near term, and that it may be necessary to include both measurement approaches in the exposure draft on an insurance contracts standard if the IASB agrees with its staff recommendation.

In light of its concerns, "GNAIE respectfully asks the IASB to consider the issues that remain to be resolved in the IAS 37 project and the problems with attempting to apply such an approach to insurance contracts," said de. St. Paer. "GNAIE is optimistic that such consideration will lead to conclusions similar to those reached by the FASB and will be a significant step toward convergence of international accounting standards."

In the letter to the IASB, GNAIE observed that IAS 37 is still very much a work in progress with key issues yet to be resolved, such as treatment of service obligations.

Similarly, GNAIE said the IASB and FASB joint project on Revenue Recognition is unfinished. However, GNAIE believes that the tentative conclusions reached by the two Boards, such as the customer consideration approach, are much more consistent with the CFV approach that the IASB is considering for insurance contracts than they are with the pending IAS 37 approach.

In addition, GNAIE noted that both the IASB and FASB have tentatively agreed that the initial liability for insurance contracts should be "no gain at inception."

The CFV approach reaches this result with a composite margin derived from the premium charged for the contract and the expected cash flows, according to GNAIE. In contrast, the IAS 37 approach would break the margin into a risk component, perhaps a service component, and a residual component. "These distinctions would add significant complexity without providing significant value," GNAIE said.

The letter further pointed out that the pending IAS 37 is fundamentally based on transferring contract obligations, even though the IASB staff has acknowledged that there is typically no active market for the transfer of insurance obligations.

A transfer measurement approach is inconsistent with the basic operations of insurance entities, and must be based on hypothetical events that are unlikely to occur, said GNAIE. "Measurements on such a basis necessarily rely on theoretical assumptions about what the conditions should be in markets that do not exist," it pointed out.

GNAIE noted that such an approach will require substantial guidance to implement and, even with such guidance, the measurement would not be grounded in observable and verifiable market information and would be difficult to compare among entities.

The letter to the IASB observed that GNAIE's concerns about such measurement are similar to those widely expressed about the Current Exit Value measurement proposed in the IASB's 2007 discussion paper on insurance contracts and ultimately rejected by both the IASB and FASB.

The goal of GNAIE is to influence international accounting standards to ensure that they result in high quality accounting and solvency standards for insurance companies and, to that end, to increase communications between insurers doing business in North America and international regulators and standard setters. GNAIE works to meet its goals through modeling of proposed accounting standards, analysis, comment and coordination with various end users of financial reports.

SOURCE GNAIE