GAAP (noun, abbr.). GAAP is the eminently appropriate acronym for many various, usually ostensibly national, and often extremely flexible sets of rules followed by those who prepare insurance companies' official financial statements. The acronym stands for Generally Accepted Accounting Principles, an ironic name for a group of rules which are neither generally accepted (indeed variants of GAAP in Europe number nearly as many as there are large re/insurers), nor are they likely to seem, in the eyes of any business ethicist who might care to probe their vagaries, particularly principled.
In the US, GAAP is well established, and known as US GAAP. The American rules provide an extremely useful service: many large re/insurers from Europe and Bermuda are listed on the venerable big board at the New York Stock Exchange, which forces them to report in US GAAP. This should not be confused with requiring transparency or obviously comprehensible figures. Indeed, US GAAP allows insurers to report in their technical accounts a top-line premium income net of reinsurance premiums ceded, just one provision which tends towards obfuscation. However, the growing move towards US GAAP does make more companies' results comparable, notwithstanding the huge leeway it allows re/insurers in terms of reporting their fiscal position.
It is the flexibility within European GAAP that has allowed insurers to take advantage, because in practice it has no single GAAP. Rather, European accounting consists of an atomised set of evolving national norms, rules which in times of need can be altered according to the situation. Such flexibility was demonstrated by the recent presentation of a very large European insurer's results according to a set of principles the insurer described as 'New Basis Swiss GAAP'. Presumably NBS GAAP provided the insurer with a more appropriate system for explaining its fiscal performance which, soon after, led to a withering collapse in its share price and the sale of numerous divisions and assets.
All that is to change, thanks to the good offices of the International Accounting Standards Board (IASB). The IASB describes its role as "developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements." A laudable mission indeed. Alas, the IASB's proposals for what could be called 'World GAAP' for insurance have fallen more heavily than the proverbial lead balloon.
Despite promising only "limited improvements to accounting practices for insurance contracts, without requiring major changes that may need to be reversed," the IASB's rather draconian proposals include the elimination of catastrophe and equalisation reserves (which allow companies to stash money to one side, tax free, to cover future losses arising from claims or, commonly, lousy underwriting), and the introduction of a requirement for a 'loss recognition test', something that seems unnecessary since it is evident to all that insurers are more capable than most of recognising and indeed reporting astounding losses, no matter what accounting conventions they use.
Another IASB requirement would force insurers to keep insurance liabilities on the balance sheet until they are discharged, cancelled or expired - which may take the shine off some finite reinsurance schemes. Perhaps most alarmingly of all, IASB is insisting that all such liabilities be reported gross, without consideration of related reinsurance assets. And that's only some of the provisions of Phase One.
Meanwhile the Comité Européen des Assurances (CEA) has fought bravely against 'IAS 32' and 'IAS 39,' which involve the arcane valuation of insurance contracts. They could have led, the CEA claims, to a serious mismatch in insurers' assets and liabilities. Likewise the Geneva Association, a veritable 'who's who' of insurance company chief executives from across Europe, has slammed the proposals, in part because the European Union requires new decrees by the IASB to be adopted by all relevant companies in the EU. Just two weeks before the IASB published its proposals on accounting for insurance contracts - which are supposed to smooth the mismatch problems - the CEA and other industry lobbyists successfully won an EU deferral of adoption of offending standards 32 and 39.
Much bluster and dash has been exuded by both insurers and the superbly named Sir David Tweedie, Chairman of the IASB. As the arguments continue, however, two things are clear. First, re/insurance accounting is notoriously opaque and inconsistent from country to country. Second, if these enormous breaches are to be repaired, some new form of GAAP must be widely adopted, generally accepted, and truly principled. And it won't be popular.