US rule proposal could boost insurer derivatives use

The National Association of Insurance Commissioners (NAIC), an official body that develops model insurance regulations for adoption at the US state level, is considering a new accounting guideline that would allow US-based insurers to report hedge transactions in their underwriting income statements. All US insurers must comply with statutory accounting guidelines, so this potential change could encourage greater use of derivatives.

In minutes from a December meeting of the NAIC’s insurance securitisation working group, Joseph Sieverling, director of financial service at the Reinsurance Association of America, said substantive agreement had been made on a proposal by the new guideline’s lead proponent, Jeff Alton, assistant vice-president, financial regulation and capital management, at Chicago-based CNA Financial Corporation. The Reinsurance Association of America has often been against changes in the rules as they could have a negative impact on the reinsurance industry.

Remaining details will be discussed in a conference call next month.

Current US statutory guidelines require hedges to be reported in investment or other income, which has held up wider use of insurance risk hedging, according to Alton. “The accounting guideline we’re proposing for statutory is exactly what’s in FAS 133,” he said, referring to the new accounting standard requiring US corporations to mark their hedges to market. “If we can show we’ve transferred risk through a derivatives contract and the derivative's highly effective, then the benchmark is exactly the same for Gaap.”

Once entered on its underwriting income statement, a qualifying hedge under the new guideline could improve an insurer’s combined ratio and loss ratio, which measure insurer financial performance and credit quality.

Alton said the new guideline, if approved by the NAIC, and adopted by any US states, would not be a “night and day” change, but rather another tool for insurers to manage their risks in addition to traditional reinsurance.