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Fair play.

It's called fair-value accounting, but insurers question whether it's fair to them. The International Financial Reporting Standard is set to replace the various country-based accounting standards among members of the European Union on Jan, 1, 2005, However, the version that will be adopted relating to insurance contracts--IFRS 4--is the result of a compromise between the International Accounting Standards Board and the insurance industry in Europe, which had several problems with the way the proposed standard would treat insurance contracts, particularly concerning the fair-value method of accounting.

Under fair-value accounting, companies have to report the current market value of such items as invested assets and liabilities. In the case of liabilities, it's "meant to be an estimate of what you could sell your block of liabilities for," said William Hines, consulting actuary in the Boston office of Milliman Inc. There is no market for insurance liabilities, however, so companies must use a modeling approach. "And it's hard to calibrate those models in a way that will be consistent across companies and products," Hines said.

The history, possibilities, problems and prognosis of the new mandate are the focus of our cover story, a Big Picture feature entitled "Reserving Judgment," beginning on page 22.

Under IFRS 4, insurers do not have to implement fair-value accounting immediately, but can choose other methods for a few more years, while the IASB studies the issue of insurance contracts.

As working groups seek to solve the problems, "I believe fair-value will be the starting point," Hines said. "They'll have to be convinced to move off to something else." The IASB has formed a group of insurance and accounting representatives, who are offering input, but they're not a decision-making group, Hines said. The U.S. Financial Accounting Standards Board is talking with the IASB about the project, which means U.S. insurers bad better pay attention, too, Hines said. U.S. insurance trade groups, and a special purpose group called Group of North American Insurance Enterprises, are speaking out in the debate, he said.

Someone has to decide if the rules in international business, like the rules in other competitions, are fair to all.

Sally Whitney is editor. You may reach her at (908) 439-2200, Ext. 5340, by writing to A.M. Best Co., Ambest Road, Oldwick, NJ 08858, or by e-mail at The e-mail address for Best's Review is
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Title Annotation:Editor's Prologue
Author:Whitney, Sally
Publication:Best's Review
Date:Dec 1, 2004
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