Midwest Actuarial Forum
March 17, 2006
International Accounting and
the Casualty Actuary
Sam Gutterman, FCAS, FSA
PricewaterhouseCoopers
Agenda
• International Accounting Organizations
− The IASB and the FASB
− The IAIS and the NAIC
• IASB activities
− Background
− Current status
− Current discussions and the future
• IAIS activities
International Accounting and the
Casualty Actuary
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International accounting organizations (1)
Why is everything suddenly international ?
• Globalization of commerce
• Increase in reach of multi-national insurers and reinsurers
• Enhancement of standards and regulation
• Old national methods have not always worked
- Lack of accounting transparency
- Inadequate international financial institution regulation
In some cases, this is where the action is
International Accounting and the
Casualty Actuary
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International accounting organizations (2)
The International Accounting Standards Board
• Formerly the International Accounting Standards Committee
− About 27 years old
− Standards were primarily for countries without an existing accounting
standards organization
• Reformulated five years ago as the IASB
− Originally charged by IOSCO and the G7 to develop a high quality set
of international accounting standards, as opaque accounting was
blamed as being a significant contributor to the Asian financial crisis
of 1996-97, which spread into Russia and South America
− Beginning in 2005, standards of the IASB (referred to as International
Financial Reporting Standards or IFRS) are now used by 95
countries, including those in the European Union
International Accounting and the
Casualty Actuary
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The IASB and the FASB
• The current buzzword is “convergence”
− Pressure continues to mount for a convergent set of internationally
recognized accounting standards
− For a while, it looked like US GAAP would be sufficient
− For lots of reasons, including European dislike of detailed US GAAP
rules, this approach did not win out
• October 2002, a general agreement was reached to converge
over time
− Goal – is to have a single global set of high quality, transparent standards
that are useful for economic decision-making
− Reality – gradual progress through mutual cooperation
• January 2006, this was confirmed with a specific 3 year plan
International Accounting and the
Casualty Actuary
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International accounting organizations (3)
The International Association of Insurance
Supervisors
• About 15 years old
• Originally a talking shop among national supervisors
• Currently setting guidance for use by national supervisors
• Emphasis on principles, looked at to as a guide for
supervisory activities
• In the same building as the Basel Committee
International Accounting and the
Casualty Actuary
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The IAIS and the NAIC
• The NAIC has tended to be quite insular, as has been the case
for most U.S. regulatory bodies due to large size of the U.S.
market
• Upon pressure by the OECD and the G7, international financial
industry regulators have become quite active because of the
increasing dominance of multi-national financial institutions
• The IAIS has launched a set of very aggressive regulatory
projects, but is still looked at as providing guidance as opposed
to imposed international solutions
• The NAIC has recently become quite involved in IAIS activities
International Accounting and the
Casualty Actuary
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International accounting organizations (4)
The International Federation of Accountants
• Association of 163 national accounting organizations in 120
countries
• Includes:
- International Auditing and Attestation Board
• Responsible for international auditing standards
- International Public Accounting Standards Board
- International Education of Accountants
- International Ethics Standards Board
• Was recently reorganized to better emphasize the public
interest and public oversight
International Accounting and the
Casualty Actuary
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The IASB and Insurance Contracts
The history
•
•
•
•
1997 – IASC started Insurance project
1999 – IASC Insurance Issues Paper
2001 – Draft Statement of Principles – never completed
2002 – IASB split insurance contracts project into two segments
- Phase 1, a compromise short-term fix to meet Europe 2005
deadline
• 2003 – Exposure Draft (ED 5)
• March 2004 – published IFRS 4, Insurance contracts
• January 2005 – implemented in Europe along with rest of IFRS
- Phase 2, a more rigorous solution currently in development
International Accounting and the
Casualty Actuary
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The IASB – Current Status
Convergence
• The FASB and the IASB has agreed on convergence,
with an uncertain pace
• Insurance Contracts is a modified joint project
− The IASB is taking the lead
− The FASB will distribute Discussion Paper to its stakeholders
 Depending on responses will participate in Exposure Draft
development
− Whether the identical or similar standard will be issued
remains to be determined
International Accounting and the
Casualty Actuary
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The IASB – Current Status
Current projects affecting insurance
• Insurance contracts
• Conceptual framework
− Including definition of assets and liabilities
• Fair value measurement
− Will expose to stakeholders after corresponding FASB
standard issued
• Business combinations
− Common Exposure Draft issued, negative response, could
include discounting, risk adjustment and renewals
International Accounting and the
Casualty Actuary
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The IASB – Current Status
Current projects affecting insurance (cont’d)
• IAS 37 – Provisions
− For self-insurance, might be fair value
• Revenue recognition
− May not be premiums, might be risk transfer
• Performance reporting
− What is income, how it should be displayed
International Accounting and the
Casualty Actuary
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The IASB – Current Status
IFRS 4 Insurance Contracts
• Definition of insurance – focus is on significant
insurance risk (other than financial risk)
− Have not explicitly focused on reinsurance risk transfer
− Contracts not insurance are either investment or service
• Generally, entity’s accounting policy is local GAAP that
is grandfathered
− Can change if more relevant or more reliable than current
accounting policy
• Liability adequacy test
− OK to use local GAAP test if it considers all future cash flows
International Accounting and the
Casualty Actuary
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The IASB – Current Status
IFRS 4 Insurance Contracts
• Reinsurance asset impairment test
• No liability for future claims on future contracts
− No equalization or catastrophe liabilities
• No offset of reinsurance against insurance
• Allows profit/loss on ceded reinsurance, with proper disclosure
• Can have mismatch of asset / liability bases
− More of a problem for life insurance
• Requires expanded disclosure of accounting policy and risk
International Accounting and the
Casualty Actuary
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The IASB – Current Status
Selected other requirements
• IAS 32 and ED 7 – Financial Instruments: Disclosure and
Presentation
− Includes fair value option for liabilities – choice if certain conditions met
• IAS 39 – Financial Instruments: Recognition and Measurement
− For investment contracts – choice of fair value and amortized cost
• IAS 18 – Revenue
− Amortized deferred Transaction Cost (DTC) asset for service contracts,
e.g., third party administrative or asset management contracts
• Assets
− Similar to US GAAP, with same 3 categories – amortized cost, held to
maturity, and trading, with derivatives always at fair values
International Accounting and the
Casualty Actuary
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The IASB – Current Discussions
Insurance Contracts – Phase 2
• Started in earnest in September 2004
− With first meeting of IASB’s Insurance Working Group
− Dealing with contracts rather than companies
 Due to desire for consistency across industries
• Board held several educational sessions beginning in
January 2005
• No final decisions reached yet
International Accounting and the
Casualty Actuary
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The IASB – Current Discussions
Insurance Contracts – Phase 2 constraints
• Consistency with current Framework
− But Framework currently being reviewed for the long-term
• Board has declared it is not wedded to fair values
− But so far, looks like prospective values
− Discounting is almost a sure thing
 But North American P&C industry still fighting it
− Risk margin to be explicitly reflected
 If calibrated to a market value, referred to as a market value
margin (MVM)
• Minimum deposit floor, unless IAS 39 changed
International Accounting and the
Casualty Actuary
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The IASB – Current Discussions
Claims Liability – Phase 2
• Major components (refinements to be added)
1. Current expected values
2. Discounted
− Possibly at risk free rates
3. Risk adjusted
− Key outstanding issue
− Different approaches being studied by IAA
− How: currently being discussed


International Accounting and the
Casualty Actuary
As a function of cost of capital?
By confidence interval or conditional tail expectation?
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The IASB – Current Discussions
Contract liability
• Three choices still being studied
− Unexpired risk liability – exit value, business-to-business
 Prospective using current assumptions
 Possible to have profit at issue
− Unexpired risk liability – current entry value, business-to-customer
 Initially no profit-at-issue
 Prospective using current market prices of similar contracts
 Similar to exit value, except possibly risk margin fixed at inception
− Unearned premium less current DAC balance
• All subject to a liability adequacy test, although the same as
exit value
• Revenue – if risk related, might have revenue throughout
claims process
International Accounting and the
Casualty Actuary
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The IASB – Current Discussions
Risk margins
• Of interest to both to the IASB and the IAIS
• Through discount rate or cash flows
• What is the purpose of an explicit risk margin in a financial
statement
− How prudent should the liability be? How to calibrate? What risks
to include?
− For claims liability – should it be:
 Included in the price that a buyer will demand to take on the insurance risk or
 Reflect historical claim development fluctuation over a specific time period?
− For contract liability – should it be:
 Total profit and risk margin – the aggregate pricing load or
 Reinsurance price-sensitive factor that could swing with the underwriting
cycle?
International Accounting and the
Casualty Actuary
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The IASB – Current Timetable
Insurance Contracts – Phase 2
IASB Discussion Paper
December 2006
Exposure draft
2007 / first half of 2008 ?
Final standard
2009 ?
Effective
2011 ?
International Accounting and the
Casualty Actuary
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IAIS Activities
• Attempting to reinvent worldwide regulatory accounting
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−
−
−
Based on general principles
Enhance insurance regulation
Financial statement components, capital adequacy assessment
Liabilities possibly consistent with IFRS
 Controversial
− Very difficult, as culture can vary significantly by jurisdiction
• Working with the IASB and the IAA
− Recently the IAIS asked the IAA to develop acceptable approach to
assess liabilities and financial condition – the Roadmap
− Not all countries have RBC
 Some have flat amount of minimum capital
− Wrestling with very basic questions
International Accounting and the
Casualty Actuary
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