Insurance and reinsurance company executives are criticizing a proposal by the Financial Accounting Standards Board that could require insurers to divide reporting of "insurance risk transfer" from "financial risk transfer" for products such as group life insurance.
FASB, Norwalk, Conn., issued an invitation for comments in May that suggested that it might deal with the controversy over "finite reinsurance," or "financial reinsurance," by requiring issuers of all insurance and reinsurance arrangements that transfer financial risk to treat the financial risk transfer component of a contract as a deposit and the insurance risk transfer component as insurance.
FASB noted at the time that the rules might apply to direct insurance policies that cover relatively easy-to-forecast risks, such as group life and group health contracts, as well as the finite reinsurance contracts that have been getting most of the attention.
Financial services companies, rating agencies and other organizations have submitted dozens of comments on the proposal to split, or "bifurcate," insurance contract accounting.
Insurance company executives who have commented have called the proposal unworkable.
"Many reinsurance contracts contain risk-limiting features which are closely interlinked with risk-taking features," writes Mark Swallow, chief accounting officer at Swiss Reinsurance Company, Zurich. "More complex insurance contracts will frequently include elements of profit sharing. This is often also the case in direct insurance… We believe that bifurcation would require judgments that are even more complex and subjective than the judgments made today."
Instead of requiring insurers to apply deposit accounting to portions of insurance contracts, regulators should be more vigilant about applying existing reporting guidelines, Swallow writes.
Robert Prie, controller of Hartford Financial Services Group Inc., Hartford, argues that "imputed deposit accounting" should be applied only to finite reinsurance arrangements.
