June 2011

Greetings!

The June edition of Insurance Perspectives examines a potential means for IFRS adoption by U.S. companies, new risk management standards, another byproduct of healthcare reform - Accountable Care Organizations - and criticism of captive insurance regulation raised by The New York Times. In addition, we highlight upcoming Invotex speaking engagements at industry conferences.

As always, we welcome your feedback and invite you to share Insurance Perspectives with your colleagues and business acquaintances. If you do not currently receive our newsletter via e-mail, please subscribe at the left.

Tom Finnell, Jim Stangroom and Les Schott
Managing Directors, Insurance Services

In this Issue

1. “Condorsement” - An Alternative Framework for IFRS in the United States
2. NAIC Game Plan to Develop New Risk Management Standards Begins to Take Shape
3. Accountable Care Organizations: Will They Change Our Healthcare System?
4. NAIC v. The New York Times on Captives - The Last Word Has Yet to be Heard
5. Upcoming Invotex Speaking Engagements

“Condorsement” - An Alternative Framework for IFRS in the United States
by Tim Foley

When the SEC discusses International Financial Reporting Standards (“IFRS”) and the future of U.S. GAAP, it rarely talks about adoption of IFRS or conversion to IFRS. Instead, the SEC refers to the possibility of incorporation of IFRS into the financial reporting system utilized in the U.S.  The former suggests a wholesale change, a full commitment. The latter suggests assimilation.   However, with its release of a May 26, 2011 Staff Paper, the SEC is now providing more direct insight into some more innovative thinking regarding the future of IFRS in the U.S.

This staff paper, entitled Exploring a Possible Method of Incorporation, outlines one of several possible approaches to the use of IFRS in the U.S. Additional staff papers are expected in the coming weeks. This first paper explores an approach that has become known as “condorsement.”

During the 2010 AICPA National Conference on Current SEC and PCAOB Developments, SEC Deputy Chief Accountant Paul Beswick introduced the term “condorsement” while discussing the possible use of IFRS in the U.S. In an April 4 interview with the Journal of Accountancy, Leslie Seidman, Chairman of the FASB, described her interpretation of condorsement as one in which “FASB plays an active role in the new standard development process, and then ultimately makes recommendations as to whether or not the U.S. adopts each new standard…setting a clear and rigorous criteria for when a difference would ever be warranted…”

The staff paper comes with an abundance of qualifying statements, meant to convey the message that no decisions have been made and that the condorsement approach is but one of many possibilities. That said, it is apparent that the SEC is seriously considering this approach, one that would retain U.S. GAAP (if in name only), retain an important, ongoing role for the FASB, and would address many of the concerns voiced by practitioners by ensuring an orderly transition that would take place over a period of five to seven years.

Other jurisdictions around the world have embraced IFRS in one of two general ways, by either full use (simply adopt IFRS as issued by the IASB) or through incorporation. Full use is rare as few jurisdictions have taken this approach. Those that have done so tend to be those countries with less developed internal accounting standards or policies. The more common incorporation approach takes into consideration national laws and regulations and considers IFRS on a standard by standard basis. Research shows that most jurisdictions apply the incorporation approach in one of two ways, convergence or endorsement.

Convergence Approach – Keep national accounting standards but make every effort to eliminate material differences with IFRS over time.

Endorsement Approach – Incorporate individual standards in the national body of standards, often word for word, with a high threshold for country-specific deviation.

The condorsement approach is a hybrid approach and contains elements of both convergence and endorsement. Some of these key elements are as follows:

• Ongoing role for FASB – To continue to assist the SEC in fulfillment of its mission(1) by assisting in the development and promotion of high quality, globally accepted accounting standards; to be proactive in identifying new and emerging financial reporting issues; and to ensure that U.S. interests are suitably addressed in the development of those standards.
• New role for FASB – Specifically, FASB would participate with the IASB in the development of new standards (or revisions to existing standards), assist in planning the IASB’s agenda, help develop implementation guidance and ultimately continue to promulgate U.S. GAAP through endorsement of IASB standards it helped develop.
• SEC Oversight – The SEC would continue with its oversight role over FASB, interact directly with the IASB (but with no oversight role) and participate on oversight committees, follow the meetings and activities of the IASB standards-setting projects, review drafts of standards and provide feedback to the IASB and its staff.
• Transition Element – Unique to the framework outlined in the staff paper, is the full, but potentially staged or phased, replacement of existing U.S. GAAP through the incorporation of IFRS through an orderly transition plan.
• Grouping of Standards – Standards are placed into groups based on their status: those in the process of being changed or updated; those likely to be changed in the future; and those unlikely to change in the foreseeable future.
• Efficient and Orderly Transition – By scheduling the effective dates of newly incorporated standards in a strategic way, the SEC hopes to avoid multiple standard changes, and promote a slow but orderly, and in theory less costly, implementation over a period of 5 to 7 years.
• U.S. GAAP Remains – Though its content is essentially replaced by IFRS.

The SEC has requested that comments on its staff paper be received before July 31, 2011. It has also stated that the approach outlined in the paper is one of many possibilities and is not meant to represent the commission’s preferred approach at this point in time.

In our view, the condorsement approach contains elements that many would have expected, e.g., an ongoing role for the FASB and the capability and flexibility needed to ultimately control financial reporting in the U.S. without having to completely rely on the IASB. However, while the intent is for the “new U.S. GAAP” to be viewed as fully conforming to the requirements of IFRS, FASB maintains the responsibility for determining whether and how new IFRS standards are incorporated into U.S. GAAP. How well FASB may perform that function will determine if, at any point in time, U.S. GAAP is viewed as compliant with IFRS, as promulgated by the IASB. Winding up with a “U.S.-flavored IFRS” could be problematic relative to how U.S. companies are perceived on the world stage.

(1) The SEC describes its mission in the staff paper as the protection of investors, maintaining fair, orderly and efficient capital markets, and facilitating capital formation in the United States.

Back to top.

NAIC Game Plan to Develop New Risk Management Standards Begins to Take Shape
by Tom Finnell

In a prior newsletter, we informed readers about a proposal that had been submitted in February by the NAIC that would require insurers to have something in place that has been dubbed an “ORSA” – Own Risk and Solvency Assessment. Initial reactions by the industry were received shortly thereafter in the form of comment letters and then in oral comments made by industry representatives at the NAIC’s Spring National Meeting that was held in March in Austin, Texas. With some time to digest those comments, the NAIC recently issued a “Timeline for ORSA Discussions” that calls for a series of conference calls leading up to the Summer National Meeting to be held in Philadelphia in August; a public hearing in October; and submission to the Solvency Modernization Initiative Task Force in November.

Whether or not that schedule will hold remains to be seen. However, in the first of the conference calls, which was held last Friday, it became clear that the proposal itself may not be what it first seemed.

To many in industry, the proposal that was submitted in February appeared to be an initial draft of a future regulation covering proposed requirements. On last Friday’s call, however, NAIC staff softened their stance about that, indicating that the document was intended to move the discussion forward with the ultimate form of any formal requirements, and where those would be housed, yet to be determined. For example, while a model regulation could be one possible outcome, NAIC staff indicated that any guidance that may ultimately be developed could possibly wind up as a new supervisory manual, or embedded in existing manuals such as the Examiners Handbook or the Financial Analysis Handbook. The outcome is more important than a matter of geography, i.e., the location of text. Where the guidance may ultimately reside speaks to who will be responsible – insurers or regulators – and for what.

It is clear that an important part of any new guidance, wherever it may be housed in the regulatory literature, will be the preface – a discussion of the objectives to be achieved and how ORSA will be used by regulators. Some potential uses have already been mentioned. For example, an insurer’s ORSA can help jumpstart a risk-focused financial exam or provide risk insights about the company in the interim period between exams. But, to date, it does not seem that the Group Solvency Issues Working Group has fully considered and spoken as a group as to how regulators should use an ORSA. Unless and until there is consensus and clarity as to such a preface and with some critical mass of industry support, our view is that both the timeline and roadmap to ORSA will remain in doubt. The working group’s next call is scheduled for June 24. We’ll keep readers posted on further developments.

For more information, contact Tom Finnell.

Back to top.

Accountable Care Organizations: Will They Change Our Healthcare System?
by Don Sirois

With the advent of healthcare reform, one topic generating a great deal of discussion is delivery system change, including Accountable Care Organizations (ACOs). An ACO is a set of healthcare providers — including primary care physicians, specialists and hospitals — that work collaboratively and accept collective accountability for the cost and quality of care delivered to a population of patients. The concept of ACOs appeared in only a few pages of the massive 2010 Patient Protection and Affordable Care Act. But, the Act established a program implementation date of January 1, 2012 and required the U.S. Department of Health and Human Services (HHS) to draft rules for ACO formation.

In March 2011, the Centers for Medicaid and Medicare Services (CMS) of HHS released more than 400 pages of such proposed rules for public comment. Healthcare providers in an ACO are expected to take on some of the financial risk of patient care – the traditional role of a health insurance company. As such, insurers, faced with the potential for slimmer profit margins as a result of other reform initiatives, may see participation in the ACO arena as a potential opportunity to diversify. Several insurers have already announced plans to form their own ACOs, but most are likely to tread lightly given the uncertain environment as rules develop and as they determine the impact on their business of provider groups forming in a risk sharing capacity.  

The goals of an ACO are to realign the payment system such that providers are paid for outcomes rather than for providing an array of services, and to improve the delivery system by having doctors and hospitals work together in a more collaborative manner. The ACO attempts to address these issues by linking payments to the quality and utilization of health services. ACOs will not eliminate fee for service plans but would incent providers to save costs by offering bonuses when providers meet quality benchmarks while also keeping costs down. Although it is a relatively new concept, it incorporates and builds upon ideas from several other reform models that have been discussed for years.

Do you remember the promise health maintenance organizations (HMOs) made during the 1990s? They were going to lower cost and improve care by moving subscribers away from their fee for service plans and placing their care in the hands of primary care physicians. However, they also limited the subscriber’s ability to see the doctor of their choice and restricted their ability to receive treatment recommended by doctors in an effort to lower costs. HMOs still exist, but they have since eased their limits on patient choice and treatment. Hopefully, ACOs won’t relive that bit of history and will instead provide for groups of primary care doctors, specialists and hospitals that will collaborate to provide quality care in a more economical manner.

Back to top.

NAIC v. The New York Times on Captives - The Last Word Has Yet to be Heard
by Tom Finnell

Last month, The New York Times published an article entitled, Seeking Business, States Loosen Insurance Rules, in which they described the business of captive insurance companies, the expanding number of state domiciles that provide havens for them here in the U.S., as well as what the authors apparently perceive to be an increasingly relaxed regulatory environment in which they now operate. The article essentially depicted a race to the bottom with states easing regulatory restrictions on captives in order to gain business and tax revenues.

It is ironic that the states would be the subject of such an allegation after the work they have done through the NAIC over the past 20 years to develop and enhance the NAIC’s Financial Regulatory Standards and Accreditation Program. Their work raised the bar to a more consistent level across all states with regard to the regulation of traditional insurers and, in light of efforts currently underway, should have a similar impact globally as the states and the NAIC work with the International Association of Insurance Supervisors. Nonetheless, the number of states that call themselves home to captives and the number of captives domiciled in the U.S. both have risen dramatically over the years.

While The New York Times may have had the first word on the matter, theirs may not be the last, as the NAIC is working behind the scenes to consider its response.

On an NAIC Financial Condition (E) Committee conference call last week, Rhode Island’s Deputy Director and Superintendent of Insurance, Joseph Torti III, shared that the NAIC is performing its own research on the issue. He stated that there is some concern that there may be some use of captives that may circumvent accounting or other rules and that the NAIC staff is conducting a survey of states to better understand what situations exist that may give rise to such concerns. Moreover, he indicated that if there is an issue, it may not be related to captive regulation per se but rather to the process by which insurance company transactions are approved in some states generally. He also indicated that the NAIC will determine any future direction after digesting the results of the survey.

We’ll keep readers posted on further developments as this continuing story unfolds.

For more information, contact Tom Finnell.

Back to top.

Upcoming Speaking Engagements

Back to top.