INSURERS' BANK STRATEGY A DOUBLE-EDGED SWORD?

INSURERS' BANK STRATEGY A DOUBLE-EDGED SWORD?

Some insurers are pulling out all the stops to try and keep banks out their business, but a few of their tactics could backfire, according to some experts.

Because banks have won a series of court and state legislative victories allowing them to sell insurance, some insurers are urging further scrutiny of banks in the wake of the savings and loan disaster.Insurers, playing on the fears of lawmakers, say that allowing banks to sell insurance may force taxpayers to bail out financially weak banks that founder because of an ill-advised insurance venture.

Those insurers note that part of the thrift debacle was due to expanded insurance powers.

All financial institutions currently record assets on financial statements at their purchase price. But critics say this inaccurately portrays net worth,

because the market price of those assets may be significantly more or less.

Some insurance executives, who do not want to be named, are quietly pushing for a change in accounting rules for all financial institutions. They say that if banks were forced to record their assets at market value, many would be shown to be financially weak and therefore incapable of taking on the extra risks.

Groups that represent the nation's largest insurers, like the American Insurance Association, are not involved in this effort.

Moreover, some insiders say that no member of the insurance industry should force such a debate, because the use of market value accounting would apply to them and expose any individual company weaknesses as well.

But at least one economist, who is commissioned by several insurance groups such as the Professional Insurance Agents and the Independent Insurance Agents of America said the accounting change is worth fighting for.

As for the prospect that the change would be applied to banks and insurance companies equally, "What's sauce for the goose is sauce for the gander," said Sophie Korczyk.

She stresses her belief that insurers' financial statements would be superior, since they must exercise greater prudence in the absence of the federal insurance protection enjoyed by banks.

"If people's own resources are at risk, they don't like danger as much," said the economist.

But not everyone agrees that insurance companies would come out untarnished by a change in accounting systems.

A typical insurance portfolio has 57 percent invested in bonds, according to the American Council of Life Insurance. The value of a bond can fluctuate dramatically with interest rate swings, and if insurers are forced to value their holdings when prices are down, their net worth would shrink.

If insurers had to use market value accounting, "another round of rising interest rates (which causes bond prices to drop) like we had in the 1980s, would cause insurers tremendous hardship," said Steven Kellison, an insurance professor at Georgia State University.

But Wayne Kauth, a certified public accountant who specializes in insurance, said that if assets are going to be recorded at market values, then, in order to be fair, so must the liabilities.

His reasoning is that the same interest rate rise that would reduce the value of a bond held as an asset would mean that the company won't have to set aside as much money in reserves to meet its future claims. And those reserve

funds are by far the biggest liability on the insurer's balance sheet.

The net effect of the decrease in asset and liability value, according to Mr. Kauth, would be a 10 percent to 30 percent increase in an insurer's net worth.

That may be true, but government authorities responsible for financial statement disclosures are only talking about requiring the asset side of the balance sheet to be valued at market values, not the liability portion.

For this reason, insiders say that insurers wishing to prevent banks from selling insurance should channel their energies in another direction.