In 2001, the International Accounting Standards Board was created to develop International Financial Reporting Standards, or IFRS. The goal from the outset was to create a single set of global accounting standards for use worldwide. The effort began in 2002 with the so-called “Norwalk Agreement” under which the IASB and Financial Accounting Standards Board signed a memorandum of understanding on the convergence of accounting standards. As it relates to insurance contracts, FASB first issued a Discussion Paper in 2010, and in June 2013 released a proposed Accounting Standards Update. At around the same time, the IASB released its proposal. The two exposure drafts were far from converged and the FASB proposal was a significant departure from U.S. Generally Accepted Accounting Principles, or GAAP.
Perhaps the biggest departure from GAAP was the proposed change to how insurers estimate reserves. The FASB proposal would have changed the long-standing industry methodology of applying Management’s Best Estimate in determining reserves. Sophisticated actuarial measures are not necessary for short duration liabilities. In addition to a new methodology, the FASB proposal would have required the discounting of these reserves. The application of discounting and risk margins to non-life claim reserves will not provide useful information.
In 2014, the FASB abandoned the goal of obtaining a converged standard for insurance contracts. NAMIC members were instrumental is achieving this success; over 70 comment letters were sent to the FASB from NAMIC members opposing the exposure draft. Instead of rewriting the GAAP standard to appease IASB, FASB decided to retain their model but would propose new disclosures that would provide more information about insurance liabilities. In 2015, FASB adopted an ASU that included new disclosures, many of which were borrowed from statutory accounting. Ultimately the NAIC rejected the ASU for statutory accounting purposes with the indication that reporting entities shall follow the established statutory accounting disclosures. Disclosure requirements that have been rejected by the NAIC in whole or in part do not need to be evaluated by the auditor in order to determine whether the annual audited statutory financial statements achieve fair presentation in accordance with the insurance statutory basis of accounting.
NAMIC supports accounting standards that are cost-effective to apply. In addition, accounting standards should result in measures that reflect the economic model used by the business. Therefore, the application of discounting or risk margins for short duration claims reserves is not appropriate and does not lead to decision useful information nor is it cost justified. Further, NAMIC supports settlement value based on contract fulfillment with the customer rather than an exit price value to measure insurance liabilities. Revenue, claims, expenses, and the resulting profit or loss should be recognized over the coverage period to match the provision of risk protection services. Finally, an accounting model for insurance contracts should enable the use of appropriate metrics to measure performance and financial strength.