CONTACT: Doug
Barnert
1-212-480-0808
doug@gnaie.net
WATSON WYATT RELEASES ALTERNATIVE ACCOUNTING METHODOLOGY FOR LIFE INSURANCE
STUDY
February
7, 2005 (New York) Group of North American Insurance Enterprises (GNAIE)
Chair Howard I. Smith today announced the public availability
of a Watson Wyatt report Development of Alternative Accounting Methodology
for Life Insurance and Similar Products. GNAIE commissioned the report
to
study a general accounting methodology that could be used by life insurance
standard setters around the world.
“
GNAIE’s goal in publishing this report is to encourage international
discussion on these and other potential models. GNAIE is not presently
endorsing any particular accounting model. The report will be a valuable
resource
document for developing accounting standards that will enhance the
value of financial statements to investors and other users,” said
Smith, who is AIG Vice Chairman and CFO.
GNAIE
members include companies who are the largest global providers
of insurance and substantial multi-national corporations. All are
major participants
in the US market. The goal of GNAIE is to influence international
accounting standards to ensure that they result in high quality
accounting standards
for insurance companies and, to that end, to increase communication
between insurers doing business in North American and the International
Accounting
Standards Board (IASB) and the United States Financial Accounting
Standards Board (FASB). GNAIE works to meet it goals through modeling
of proposed accounting standards, analysis, comment,
and
coordination with various end users of financial reports.
The
goal of the methodology was to retain features of existing accounting
standards
which facilitate the measurement of the value of the company
while introducing new features which would facilitate comparison
between savings
and protection products, according to the report’s summary.
The methodology developed by Watson Wyatt, entitled “Alternative
GAAP,” uses
a Net Reserve calculation, which is similar to a gross premium
valuation.
The
report concludes:
- Alternative
GAAP provides a consistent measure across all product lines for the
purpose of valuing liabilities and
creating a basis
for reasonable comparisons.
- The
methodology is consistent with the objectives of preventing unnecessary
fluctuations in earnings.
- As
with any new financial reporting structure, industry practices and accounting
and actuarial guidelines
need to be developed in order to
enhance the effectiveness
of the results.
- Investments
that support long duration insurance contracts may require special standards
for measurement
and
recognition.
The
report also identifies a variety of issues that required additional
research including:
- When
and how assumptions should be unlocked.
- How
risk margins should be set.
- What
disclosures should be presented alongside the primary accounting information
- The
effects of a deposit floor
- The
treatment of guarantees to reflect policyholder behavior
GNAIE
will be working with Watson Wyatt to address these issues in upcoming
months.
Watson Wyatt’s study compares US statutory accounting, US GAAP,
and Alternative GAAP for five product lines that are common in the US:
20 year
level term, long term care, variable annuity, universal life, and participating
whole life.
“The International Accounting Standards Board has committed to a clean
slate for its second phase of the Insurance Contracts Project. At the meetings
of the Insurance Working Group,
an advisory body to the IASB, the insurance
industry has offered its resources
to assist the IASB in the development of robust standards. We believe this report
will assist in that process.” Smith
said.
“GNAIE
has published this report in hopes of stimulating discussion on this
comprehensive model. We believe the development of standards should
be based
upon a holistic modeling approach
rather than upon piecemeal decisions on
individual issues. We invite
comments from standard setters, regulators, analysts, and the insurance
industry on the
concepts presented in the report,” Smith
added.
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