NEW YORK (Reuters) ? The US Financial Accounting Standards Board is exploring rules that would make it harder for insurance companies to smooth earnings, but industry officials fear they could force far-reaching changes on insurers, including an increase in capital requirements.

The FASB ?staff document? seeks to cure abuses linked to finite ? or limited ? risk insurance, which regulators claim insurers used to reduce fluctuations in earnings and had no risk at all.

But the FASB document, recently posted for comment, might also change the way insurers report earnings, reserve for losses and even pay their taxes, roiling the $5 trillion US insurance industry, accountants and regulators said.

?It makes sense that FASB is dealing with this now, but are you trying to kill a fly with a shotgun?? said Michael Moriarty, director of capital markets for the New York State Insurance Department.

The deadline for comment on the FASB staff document is August 24. FASB?s seven-member board must decide whether to move any further with changing the rules or just keep the current ones.

Insurance groups aren?t enthusiastic about the proposals.

?They force accountants to make even more judgments.? said Joseph Sieverling, a senior vice president with the Reinsurance Association of America in Washington.

Just as people buy coverage from insurers to reduce risk, insurers reduce their own exposure by purchasing backup coverage from reinsurers. In 2005, a third of the $60 billion of insured losses from Hurricane Katrina was borne by reinsurers.

Those contracts represented legitimate risk of loss.

But regulators like New York Attorney General Eliot Spitzer have asked whether some ?finite? policies, in which the buyer has its premium payments refunded, are really loans used to shift the timing of revenue recognition.

Several major carriers including American International Group and Bermuda-based Ace, Max Re and RenaissanceRe had to restate earnings as a result of finite deals.

In order to make the difference clear, FASB is seeking comments on ?bifurcating? or dividing insurance contracts into two pieces, an insurance piece and a deposit portion.

The deposit portion of the insurance premium would represent funds that a company buying insurance could reasonably expect to get back in the form of a refund from the reinsurer.

The insurance part would represent the real risk of loss from hurricane, death or other events triggering a payout.

The theory is that insurance contracts that entail an insurer paying premium and ultimately receiving it back would classify that premium as a ?deposit,? keeping the deposit on its balance sheet and ending the motivation for deceptive finite insurance contracts.

But the proposals might also create a whole set of new problems for insurance companies that limit their risk with reinsurance, accountants said.

Counting some portion of reinsurance as a deposit could spur rating agencies to force insurers to keep more capital in reserves in case of losses, because deposits do not reduce an insurers? risk.

Bifurcation could also affect insurers? earnings because a recovery received from a reinsurer for an event such as a hurricane would reduce the deposit and not benefit the income statement, according to the document FASB staff released for comment.

Finally, there are tax advantages to insurers when risk is actually transferred, said Terry Fleming, a spokesman for the Risk and Insurance Management Society in New York, which represents buyers of commercial insurance.

Calling part of premium payouts ?deposits? might take that away.

Robert Hartwig, chief economist of the Insurance Information Institute in New York, said not all finite insurance contracts were bad, but abuses should be curbed.

?Nobody who did one ever lost any money and everyone involved likes it,? he said.

?Hopefully FASB can clear the air and make sure this becomes a good and legal product.?