Insurance group disputes liability accounting proposal
December 2nd, 2009
The New York-based Group of North American Insurance Enterprises objected to several points made in a paper written by Sam Gutterman, a director and consulting actuary at PricewaterhouseCoopers L.L.P. and past chairman of the Committee on Insurance Accounting of the International Actuarial Assn.
In his paper, “The Role of Risk Margins in a Fulfillment Accounting Objective,” Mr. Gutterman suggested that it’s appropriate to include an adjustment for uncertainty in accounting for insurance liability, and that it’s necessary to provide a risk margin in order to account for all aspects of uncertainty in measuring the liability.
Mr. Gutterman’s paper suggested the uncertainty adjustment should be included in the third of three blocks in the “building-block approach” to measuring insurance contracts put forth by the FASB and the IASB: estimates of expected future cash flows, the incorporation of the time value of money, and an explicit margin.
While not disputing the need for providing for uncertainty in life insurance contracts, in letters to the FASB and the IASB, the group said it objects to “a requirement to attempt to quantify an additional provision for uncertainty and volatility separately within the third building block.” For life contracts, the uncertainty adjustment should be included within an overall composite margin, with no requirement to quantify a specific risk margin separately within the composite margin, according to GNAIE.
The group also objected to the paper’s conclusions regarding using the three-building-block approach to measure property/casualty liabilities in the post-claim period. The organization noted that existing property/casualty post-claim reserves are determined through the use of actuarially based best estimates that incorporate a measure for uncertainty.
“Given the lack of consensus on how the three building blocks should be implemented for nonlife insurance post-claim liabilities, we believe it would be inappropriate for the proposed accounting standard to require changes in measurement and reporting of nonlife insurance contracts in the post-claim phase that would be based on unproven theory,” the GNAIE said.
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Tags: Group, Group Disputes
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