International Financial Reporting
for Insurance Contracts
2003 Bowles’ Symposium
Sam Gutterman
Agenda
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Background
Status
Outstanding issues
Future
Background
• International Accounting Standards Board
– Newly formed in 2001
– Objectives include a global set of quality
financial reporting standards
– Initial impetus – 1997s Asian financial crisis
– Renewed impetus for international convergence
– recent US accounting scandals
Background - Insurance
• Insurance contract project began in 1996
– Originated due to lack of international
standards and wide divergence of national
standards, especially for life insurance
• 2005 pressure
– European adoption of International Financial
Reporting Standards(IFRS) and International
Standards of Auditing(ISA)
Status
• In 2002 Insurance project split into two
phases
– Realization that insurance accounting issues
were too complicated to solve in time to meet
the 2005 deadline
– Phase 1 – primarily investment products,
embedded options, and disclosure
– Phase 2 – insurance contracts
Phase 1
• Most insurance contracts exempted
– Only pure non-par investment contracts included
• Preliminary indications
– Investment contracts – choice of amortized cost and fair
value
– Most insurance products – local GAAP
– Fair value
• Possibly with no profit at issue
• Covers derivatives and possibly ceded reinsurance as an asset
– “easy changes” – equalization, catastrophe reserves
– Disclosure – fair value footnotes in 2006
Phase 2
• Formal Board discussions still underway
• Asset and liability model
– EFRAG may lobby for folding into IAS 39,
with choice of method available
– Possibly with no profit but possible loss at issue
– Discount at risk-free rates
• Life / annuity products may have loss at issue
– Own credit standing risk reflected
Phase 2
• No DAC, although IAS 39 currently has external
DAC
• Renewals reflected to the extent that the
policyholder has valuable insurance benefits
• For non-life
– Discounted loss reserves
– Risk adjustment
– Possibly unexpired risk reserves rather than unearned
premium reserves
Outstanding issues
• Relatively few totally resolved
• Life industry dislikes fair value method
– Earnings volatility
– Subjective assumptions, particularly in the long-term
– In some countries, prefers deferral & matching methods
• P & C industry, to the extent it has paid attention
– Parts of it thinks it is hard enough to derive long-term
liability estimates
Outstanding issues
• Level of accounting and actuarial guidance to be
provided
• Many tough issues remain
– Market value margins / risk adjustments
• Little guidance so far, but effect might be mitigated by no
profit at issue
– Participating contracts
– Impairment testing
• Extent of ultimate international convergence
Future
• IASB pushing for 2007 Phase 2
– Likely winner – fair value approach
• Politicking might have some effect
• Move to converge
– Across industries
– Across nations
• Possible FASB convergence to IASB Phase 2?