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Reinsurance Regulatory Modernization Framework

At the National Association of Insurance Commissioners (NAIC) summer meeting, discussions continued regarding the Reinsurance Regulatory Modernization Framework, which would change the reinsurance collateral requirements. There appear to be a number of issues that would delay implementation of this framework including both constitutional and non-constitutional issues.

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The Financial Accounting Standards Board (FASB) continues to work on the Insurance Contracts project. The FASB has indicated that it will not support current exit value for reserving, but is favoring fulfillment value instead. Fulfillment value represents the amount that will actually be paid as claims become due (essentially the present value of expected losses plus a risk margin). Measurement of fulfillment value would use expected cash flows (i.e., a probability-weighted average of possible cash flow results) rather than a “best estimate.” In addition, a company should use all information available, including industry and market information and the company’s own historical data.

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Fair value accounting - also known as “mark-to-market” - has appeared in the headlines quite frequently, largely because of the ongoing financial catastrophe. Recent statements by the Securities and Exchange Commission (SEC), Financial Accounting Standards Board (FASB), and International Accounting Standards Board (IASB) have fueled the debate, and the U.S. government’s USD700 billion bailout package requires that the SEC perform a study on the impact of fair value accounting on financial institutions … and suspend the practice, if necessary.

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