New Accounting Rules and Procedures for Fire and Casualty Companies

Abstract

As UNITS within a regulated industry, fire and casualty insurance companies have long been subject to the accounting requirements of the National Association of Insurance Commissioners. In thoroughness of detail set forth concerning the various constituent elements involved in insurance company operations, the convention statement prescribed by the NAIC has made an important contribution over the years. However, to bring fire and casualty insurance company accounting into line with generally accepted accounting principles, many accountants and analysts now believe that a new approach to the practices of these companies is in order. In fact, the Insurance Committee of the American Institute of Certified Public Accountants is in the process of preparing a proposed new code, expected to take the form of supplementary statements, which will convert statutory earnings and policyholders' surplus to earnings and surplus computed in accordance with generally accepted accounting principles. In this article an attempt is made to present the modifications of insurance accounting which would be most helpful to financial analysts and stockholders in interpreting earnings and equities in net assets. PRACTICALLY every major field of business today is coping with changes that have developed swiftly in the accounting rules and procedures to which they have been accustomed. Industrial companies of all types, public utility companies, banks and finance companies, all have seen new rules of accounting formulated and thrust upon them by regulatory or accounting bodies with varying degrees of pressure. In the field of fire and casualty insurance the groundswell for revisions of established accounting rules and procedures has been building at an accelerated pace in the last few years. A forthcoming publication of the Insurance Committee of the American Institute of Certified Public Accountants (AICPA) is expected to formulate a number of proposed changes in fire and casualty insurance company accounting which in effect will constitute a suggested new code for these companies. These changes are expected to take the form of supplementary statements which will convert statutory earnings and policyholders' surplus to earnings and policyholders' surplus computed in accordance with generally accepted accounting principles. Accounting practices of fire and casualty insurance companies have been the subject of a considerable amount of controversy and misunderstanding for a number of years. The convention statement in the form prescribed by the National Association of Insurance Commissioners has been the historic method of insurance company accounting. In thoroughness of detail set forth concerning the various constituent elements involved in insurance company operations and in the uniformity of treatment which it accords, the convention statement has made an important contribution over the years. However, to bring fire and casualty insurance company accounting into line with generally accepted accounting principles a case can be made that a new approach to accounting rules and procedures for these companies is in order.