North American Insurers Commend World Economic Forum Report Citing Inadvertent Costs of Mark-to-Market Accounting

NEW YORK, April 4, 2011 /PRNewswire/ -- Insurers praised a new report from the World Economic Forum which observes that mark-to-market accounting can limit the ability to make long-term investments and promote pro-cyclical behavior on the part of long-term investors such as insurance companies.

The World Economic Forum report, The Future of Long-term Investing, recommended that policymakers consider the unintended consequences of regulatory decisions affecting accounting and capital requirements on investor ability to make long-term investments, specifically citing mark-to-market accounting as an example.

The Group of North American Insurance Enterprises (GNAIE) commended the findings of the report on the undesirable impact of mark-to-market accounting, in certain circumstances.

"We are working closely with global insurers and accounting standard setters to develop standards for insurance contracts and their underlying investments that provide understandable, transparent, comparable and reliable information about a company's performance which avoid creating artificial volatility -- such as short-term mark-to-market movements stemming from illiquid markets -- that could further destabilize already dysfunctional markets and inhibit long-term investing where economically appropriate," said Jerry de St. Paer, chairman of GNAIE.

The report said that "Mark-to-market accounting may encourage investors to focus on near-term changes in market value, rather than the long-term prospects of an investment. Stricter capital requirements may require investors to hold less risky assets and thus not take advantage of long-term risk premia."

As a result, the report noted, "the rules intended to promote transparency and appropriate risk management have a potential inadvertent cost. Long-term investors will generate lower returns due to higher risk aversion than necessitated by their liability structures, and there will be a reduction in the availability of long-term capital."

The goal of GNAIE is to ensure that international accounting standards result in high quality accounting and solvency standards for insurance companies and, to that end, to increase communications between North American based insurers and international regulators and standard setters.  GNAIE works to meet its goals through modeling of proposed accounting standards, analysis, comment and coordination with various end users of financial reports.

SOURCE Group of North American Insurance Enterprises