Life Insurance Companies to Benefit from New Accounting Guidelines

Published: Wed 09 Dec 2009

Lucas Eichmann

Life insurance companies can plan on adding more than $11 billion to their year-end 2009 balance sheets, thanks to changes in accounting guidelines approved by state insurance regulators.

Along with other changes approved by the National Association of Insurance Commissioners, the companies will be able to release more than $16 billion in capital. When the changes were requested as an emergency measure by the American Council of Life Insurers, the members saw them as ways to make it through a worsening economy. However, regulators made the company go through the regular review process before the approval, 33 to 22.

Through the new rules, the life insurance companies can receive deferred tax assets for three years and they can count them as 15 percent of their required capital and surplus. Deferred tax assets indicate expected reductions in future income taxes.

Under the former rule, the insurance companies were permitted to claim the deferred assets over the course of a year and recognize them as 10 percent of their adjusted statutory surplus.

Consumer watchdog groups were against the changes because of the way deferred tax assets are treated. That's because the assets are unavailable if the need arises for cash immediately.

Deferred-tax assets and liabilities have been required to part of financial statements since 2001. However, the value of the assets has been much more limited.

The plan approved by regulators is less liberal than the version proposed by insurers. For example, some regulators were concerned about inclusion of what they called "guard rails," which would have limited favorable treatment to those companies that were already top financial performers.

"The changes to accounting rules for deferred tax assets approved by the NAIC will provide a much more accurate picture of an insurer's financial strength," said Paul Graham, the life insurers group's chief actuary. "The new rules allow life insurers to count more of their (deferred-tax assets) as statutory capital that was previously walled off under the old rules."

The commissioners' statement said the amount of assets from deferred income tax will be "significantly limited, but some of the overconservatism has been reduced." The group's president, Roger Sevigny said, "Insurance regulators have long understood the need for conservatism in insurers' financial statements as evidenced by our current conservative reserving requirements, disallowance of assets for acquisition costs and non-admission of many other assets."

The transparency under the change will "further strengthen the industry and ultimately the protection of insurance consumers," said James Wrynn, New York's insurance superintendent.