This session will provide the fundamentals of fair value/economic value measurements for insurance contract assets and liabilities, including the particular requirements
(and potential relevance) of FAS 157 “Fair Value
Measurements.”
Moderator:
Ralph Blanchard, VP & Actuary, Travelers
Panelists:
Bruce Fell, Principal, Towers Perrin
Gareth Kennedy, Manager, Ernst & Young
Scott Lewis, CPA,Vice President, The Hartford
2008 CLRS
– September 18, 2008

FAS 157
– Fair value is the price that would be … paid to transfer a liability in an orderly transaction between market participants at the measurement date.
IAS 39
– Fair value is the amount for which … a liability [could be] settled , between knowledgeable, willing parties in an arm's length transaction.
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Key issues:
– Transfer versus settlement?
– Immediate versus orderly over time
How much do you reflect current market, if current market is in crisis
– Observed market values vs. entity specific assumptions
Final definition for insurance liabilities is still in play!
Heirarchy
– Level 1 – Observed values from a robust market
– Level 2 – Observed values for similar items (robust market)
– Level 3 – Discounted cash flow with risk margin
Risk margin based on what market requires for risk compensation
Fair value risk margin ≠ conservatism
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FAS 157 - Fair Value Measurements
– Defines fair value and provides guidance on how to calculate it.
– Does not say when to use it.
FAS 159 - Fair Value Option
– Gives companies an option to use fair value
– Decision is made contract by contract.
– Does not require it anywhere.
FAS 141R – Business Combinations (revised)
– Requires fair valuing the acquired liabilities at fair value at their acquisition date .
– Initial difference between fair value and FAS 60 value treated as a separate intangible asset
– Intangible asset is “amortized on a basis consistent with the liability … consistent with the limited guidance provided by IFRS 4. “
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IASB (International Accounting Standards Board)
– Should insurance liabilities be at fair value? What is fair value?
– When do you recognize premium (i.e., when is it “earned”)
– When will they get done with insurance standard?
Board turns over in 2011 – Do they want to reeducate a new board if not done by then.
FASB (Financial Accounting Standards Board)
– Should they join in IASB insurance project, or watch from the sidelines?
SEC (Securities and Exchange Commission)
– When do they require U.S. registrants to use IFRS (International Financial
Reporting Standards)
– Transition rules?
– How long does accounting profession need to be ready?
(Note: privately held firms follow FASB but not the SEC.)
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