U.S. Insurers Back Development of Disclosure Standards by International Association of Insurance Supervisors

A group of leading U.S. property/casualty and life insurance and reinsurance companies have reportedly endorsed the efforts of the International Association of Insurance Supervisors (IAIS) to develop high quality disclosure standards, including standards related to investment performance and risk assessment.

In a letter to the IAIS Enhanced Disclosure Subcommittee, the Group of North American Insurance Companies said: “High Quality Disclosure standards assist companies, regulators and key stakeholders in better understanding operating performance and in making more informed business and investment decisions.”

GNAIE, a trade association which focuses exclusively on financial reporting and accounting issues is a provisional Observer Member of the IAIS, pending acceptance at its October Annual Meeting.

In its response to the subcommittee’s request for comments on a draft of standard disclosures concerning investment performance and risks for insurers and reinsurers, GNAIE pointed out that the draft did not describe the holistic risk analysis process that underscores the inter-relationships of risk management practiced by insurers.

For example, GNAIE noted that companies that take little risk in their product profile might prudently take risk in their investment operations and vice versa. Further, certain risk profiles may offset another within an investment portfolio.

“We believe that all standards regarding disclosures and investment performance measurement should emphasize that the overall risk profile is paramount and the parsing of risk and the subsequent assessment thereof, while perhaps convenient from a logistical point of view, will often lead to injudicious conclusions both by supervisors and their constituencies,” it said.

GNAIE also observed that the center of the insurance market on which regulatory requirements should focus is the consumer of insurance, the policyholder, “since it is the protection of the policyholder that lies at the heart of the regulator’s role.”

The organization cautioned against diminishing the focus on policyholders by including a broader and more diverse group of audiences, such as shareholders, equity analysts, rating agencies and the media. “Such a broad objective creates the risk of developing excessive disclosure that makes it difficult for each user to extract the most critical information they seek from disclosure,” said GNAIE.

It also expressed concern that disclosure requirements may require insurers to reveal proprietary information that either has the potential to be used by other insurers to gain a competitive advantage or which could be misunderstood by readers and thus have unintended, adverse consequences to the company.

GNAIE also suggested that in developing its regulations the IAIS clarify what information is to be provided at the entity level when investments are managed at a group or conglomerate level.

In addition, GNAIE commented that the draft standard does not recognize the differing investment practices of life and non-life insurers based on the diverse products they sell, i.e. long-term products, such as life insurance and annuities, and products which have either short-term or long-term loss development patterns, such as fire policies versus medical malpractice.

“Given these anticipated differences in investment management by product line, it seems appropriate to consider separate requirements by insurance product line especially with respect to the asset-liability management area and interest rate stress testing,” added GNAIE.