Workshop on international accounting
IV Conference on Insurance Regulation and
Supervision in Latin America
Punta Cana, May 6-9 2003
Makoto Okubo, Advisor
International Association of Insurance Supervisors (IAIS)
Main items
2 May 2003
I.
IASB Activities
II.
IASB projects for insurance contracts
III.
IASB projects for financial instruments
(including contracts that do not qualify as
insurance contracts)
IV.
Existing accounting practices for insurers
V.
Questions
2
Workshop on international accounting
I. IASB Activities
• Why are international accounting standards in the limelight?
– Globalisation
– Other standards setting activities, including other financial sectors
– Convergence of accounting standards
• Seven liaison members (Australia & New Zealand, Canada, France, Germany,
Japan, US, UK)
• The EU will require the use of IAS and IFRS for publicly traded companies by
2005 with some exemptions, after the EU assesses standards whether to
endorse for use.
• FASB and IASB have issued a memorandum of understanding on October 2002
towards the harmonisation of US and international accounting standards.
• Many jurisdictions (including those in Latin America) approved IAS for use.
• Why is the role of the IAIS important in international
accounting setting?
2 May 2003
• Insurance regulators are key stakeholders in accounting setting.
• Insurance regulators need to decide the extent to which regulatory reporting
may be based upon general-purpose financial statements.
• Importance of the advice of the national insurance regulators in the
implementation of international accounting standards.
Workshop on international accounting
3
I. IASB Activities
• IASB Active Projects (examples)
– Improvements to existing International Financial Reporting
Standards
– Amendments to IAS 32, Financial Instruments: Disclosure and
Presentation, and IAS 39, Financial Instruments: Recognition and
Measurement
– Activities of financial institutions: disclosures and presentation
– Reporting performance
– Insurance contracts, Phase I & Phase II
– Concepts - revenue, liabilities and equity
• IASB Active Research Topics (examples)
– Aspects of accounting for financial instruments
– The application of international accounting standards to small and
medium-sized entities and in emerging economies
2 May 2003
4
Workshop on international accounting
I. IASB activities
Planned schedule of IASB projects on insurance
1997
Financial
Assets
And
Liabilities
(other than
insurance
contracts)
Insurance
contracts
1998
1999
2000
JWG
Exposure
Draft
JWG
Launched
1997
October
2001
2002
Amendments
to IAS39
Exposure
Draft
2002 June
2004
2005
IFRS?
2000
(Note) JWG was disbanded. Discussion on the full fair value approach
December for financial instruments was slowed down to an active research topic,
while insurance project remains taking the approach.
Insurance
Steering
Committee
Launched
Insurance
Issues
Paper
1997
April
1999
December
Field
The Board
Visit
starts
discussion Phase I
on insurance
contracts
2001
Phase II
November
(Note) The international Joint Working Group of Standard Setters (JWG) was established by the IASC Board
and other national accounting standard-setters to develop an integrated and harmonised standard on financial
instruments, which proposed the full fair value model for financial assets and liabilities.
2 May 2003
2003
(Note) On May 2002, the Board split its
project on insurance contracts into two
phases.
Exposure
Draft (2Q)
IFRS?
Field
Exposure Test?
Draft?
IFRS?
5
Workshop on international accounting
II. IASB proposals for insurance contracts
Phase I
Phase II
Scope
- Accounting for insurance contracts
- Accounting by policyholders is not addressed
in Phase I
- It would not create a new category of financial
assets (financial assets held to back insurance
liabilities) that could be held at amortised cost.
- Accounting for insurance contracts by both parties
to those contracts (insurer and policyholder) and
not other aspects of accounting by insurers or
policyholder, such as investments held by insurers
Definition of
insurance contract
- An insurance contract is defined as “a contract under which one party (the insurer) accepts
significant insurance risk by agreeing with another party (the policyholder) to compensate the
policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely
affects the policyholder or other beneficiary”;
- Some contracts that have the legal form of insurance are excluded from the definition of insurance
contracts for accounting purposes (notably “investment contracts” under IAS39).
- This definition is used throughout IFRS and to change all scope exclusions in IFRS that refer to
“insurance entities” to “insurance contracts” (for example, IAS18, IAS32, IAS37, IAS38 and IAS39)
Other issues
-
2 May 2003
Scope exclusions
Embedded derivatives
Unbundling of some deposit-like components
Discretionary participating feature of an
investment contract
- Unbundling of individual elements of an insurance
contract (to be discussed at a future meeting)
- Discretionary participation feature of an insurance
contacts (to be discussed at a future meeting)
6
Workshop on international accounting
Note 1: Example of insurance contracts
Examples of insurance contracts
under the proposed definition
Examples of items that are not insurance
contracts under the proposed definition
Insurance against theft or damage to property
Investment products that have the legal form of an insurance contract
but do not expose the insurer to insurance risk
Insurance against product liability, professional liability, civil
liability or legal expenses
Contracts that have the legal form of insurance, but that pass all
significant insurance risk back to the policyholders through mechanisms
such as performance-linking
Life insurance and prepaid funeral plans
Life-contingent annuities and pensions
Self-insurance, in other words an entity’s decision to retain a risk that
could have been covered by insurance
Disability and medical cover
Surety bonds, fidelity bonds, performance bonds, bid bonds
A contract (such as a gambling contracts) that requires a payment if a
specified uncertain future event occurs, but does not require that the
event adversely affects the policyholder or other beneficiary specified in
the contract
Product warranties (Note: product warranties directly issued
by manufactures and dealers are tentatively excluded)
Title insurance
Derivatives, in other words contracts that require one party to make
payment based solely on financial risk, i.e. changes in one or more of a
specified interest rate, security price, commodity price, foreign
exchange rate, index of prices or rates, a credit rating or credit index or
similar variable.
Travel assistance
Some catastrophe bonds
Insurance swaps and other contracts that require a payment
based on climatic, geological or other physical variables that
cause an adverse effect on the holder of the contract
Contracts that require a payment based on climatic geological or other
physical variables regardless of any adverse effect on the holder of the
contract (commonly described as weather derivatives)
Reinsurance
(Source International Accounting Standards Committee Foundation)
2 May 2003
7
Workshop on international accounting
II. IASB proposals for insurance contracts (cont.)
Recognition and
measurement
Phase I
Phase II
- The continuation of existing practices
(national GAAP) with some exceptions
- A loss recognistion test should be included.
- An insurer is prohibited from changing its
accounting policies that involve:
- Measuring insurance liabilities on an
undiscounted basis
- Creating or increasing a deliberate
overstatement of insurance liabilities
- Reflecting future investment margins in
the measurement of insurance
liabilities, for example, by using an
asset-based discount rate
- Permitting subsidiaries to use nonuniform accounting policies for their
insurance liabilities
- The asset-and-liability measurement model is used
rather than a deferral and matching model.
- Full fair value approach: assets and liabilities arising
from insurance contracts are measured at their fair value
with two caveats (entity-specific assumptions / no
recognition of net gain at inception for new contacts)
- Undiscounted measure is inconsistent with fair value.
- Expectation about the performance of assets should
not be incorporated into the measurement of an
insurance contract (unless the amounts payable depend
on the performance of specific assets)
- Fair value measurement of an insurance contract
reflects the credit characteristics of that contract,
including the effect of policyholder protection schemes
- Policyholder behavior should be taken into account.
- Acquisition cost recognised as expense when incurred
- An insurer should not recognise catastrophe or equalisation provisions
- Offsetting reinsurance assets against the related direct insurance liabilities should be prohibited.
- The same derecognition requirements for an insurer’s insurance liabilities as those for financial liabilities
Presentation and
disclosure
2 May 2003
- Fair value of insurance assets and
insurance liabilities should be disclosed
by 31 December 2006.
- All fair value changes in insurance assets and liabilities
should be recognised in the income statement of the
reporting year.
8
Workshop on international accounting
Note 2: Accounting models
• The model is an asset-and-liability model in Phase II,
rather than a deferral and matching model.
• An asset-liability-model would:
–
–
–
Measure the assets and liabilities that arise from insurance contract.
Define income or expense as an increase or decrease in economic
benefits during the accounting period, respectively.
Prohibit the recognition of assets or liabilities that do not meet the
Framework’s definition or recognition criteria, including deferred
acquisition costs.
• A deferral and matching model would:
–
–
–
2 May 2003
Recognise revenues and expenses from insurance contracts over time as
services are provided.
Premiums are deferred and recognised as revenues over the term of the
contract for short-term contracts and when received for longer-term contracts.
Acquisition costs are often deferred and amortised in order to match those
costs with related premium revenue over the term of the contract.
9
Workshop on international accounting
Note 3: Accounting models (cont.)
A Simplified Example (Traditional):
Deferral and Matching Approach
A Simplified Example (Proposed Model):
Asset-and-liability Measurement Approach
Balance Sheet
Cash & Investments
XXX
Deferred acquisition cost
XXX
Unearned premiums
Claims payable
Claims incurred but not reported
Equity
Balance Sheet
XXX
XXX
XXX
XXX
FV of assets
FV of liabilities
Equity
XXX
XXX
XXX
Income Statement
Income Statement
Premium earned
Claims incurred
Amortisation of acquisition cost
Maintenance costs
Profit or loss from insurance business
XXX
(XXX)
(XXX)
(XXX)
XXX
FV of current & future premiums
FV of current & future claims
Provision for risk and uncertainty
FV of current & future maintenance costs
Acquisition costs
Profit or loss from new business
Investment income
(= Profit or loss from investing and
Financing activities)
XXX
Changes to estimates for previous years’ business XXX
Profit or loss from insurance business
XXX
Net profit or loss
XXX
2 May 2003
XXX
(XXX)
XXX
(XXX)
XXX
XXX
Changes by passage of time
Changes to discount rate
Return on investments
Profit or loss from investing and
Financing activities
XXX
XXX
XXX
XXX
Net profit or loss
XXX
10
Workshop on international accounting
III. IASB proposals for financial instruments
(including contracts that do not qualify as insurance contracts)
IAS39
Financial assets
Securities held for trading
- Fair value (P & L)
Securities available for sale
- Fair value (equity
or P&L)
Securities held to maturity
- Amortised cost
Cash deposit
- Amortised cost
Loans
- Amortised cost
IAS39 Proposal
Securities held for trading
- Fair value (P & L)
Securities available for sale
- Fair value (equity only)
Securities held to maturity
- Amortised cost
or fair value (P&L)
Cash deposit
- Amortised cost
or fair value (P&L)
Loans
- Amortised cost
or fair value (P&L)
JWG Proposal
All financial assets
- Fair value (P & L)
Financial liabilities
-Amortised cost (except for
liabilities arising from trading
activities)
-Amortised cost
or fair value (P&L)
All financial liabilities
- Fair value (P & L)
Own debt
(and insurance
liabilities for contracts
outside the scope)
-Amortised cost
-Amortised cost
or fair value (P&L, taking own
credit risk into consideration)
- Fair value (P & L, taking
own credit risk into
consideration)
Hedge accounting
Permitted under some conditions
Permitted under some conditions
Not permitted
2 May 2003
11
Workshop on international accounting
IV. Existing accounting practice for insurers
Country
Australia
U.K.
Canada
U.S.
France
Germany
Japan
Securities
held by
insurers
Stocks
- Fair value
Bonds
- Fair value
[GAAP]
Stocks
- Acquisition cost
adjustment (*1)
[GAAP]
Stocks
- Acquisition cost
(*2)
Stocks held for longterm (fixed assets)
- Acquisition cost (*3)
Stocks held for shortterm (current assets)
Lower of acquisition
cost and current
value
Held for trading
Fair value (P&L)
Stocks
Fair value
Bonds
-Fair value or
Amortised cost
Bonds
- Amortised cost
[SAP]
Technical
provisions
2 May 2003
Fresh start
For life, MOS (Margin on
Service)
Transferable within
97.5% of the market
value
- Fair value
Other transferable
- Reasonably
estimated value not
exceeding the market
value
Non-transferable
- Reasonably
estimated surrender or
redemption value
Assets held to cover
specific policies ( i.e.
universal life)
- Market value
Prospective (prudent
assumptions)
Actuary has some
discretion over the
discount rate.
FFA (Fund for future
appropriations)
Fresh start
(*1) Adjustment
reflects fair value
change by 15%
moving average
method.
Recognition in P&L
by 15% of unrealized
and capital gains
each year.
PAD (Provision for
adverse deviation)
Actuarial report required
For non-life, a premium
deficiency reserve
needs to be booked if
premiums do not cover
future costs
Held for trading
- Fair value (P&L)
Available for sale
- Fair value
(equity)
Held to maturity
- Amortised cost
(Note)Shadow DAC
adjustment
[SAP]
Stocks
- Fair value
Bonds
- Amortised cost
Bonds
- Amortised cost
or acquisition cost
(*2)Provision would
be set up when
overall realized value
at current value falls
below book value
(for stocks and real
estates)
(Note) Current value
must be disclosed.
(Note) For life, Asset
Valuation Reserve
(AVR)
Lock in
Non-discounted
Actuarial report
required
Premium deficiency
reserve needs to be
booked if premiums do
not cover future costs
Prospective
(prudent
assumptions)
Technical provisions
cannot be below the
surrender value
Bonds
- Amortised cost,
notional amount, or
lower of acquisition
cost and current
value
(*3) Introduced by the
Available for sale
Fair value
(equity)
Held to maturity
- Amotised cost
Bonds that
correspond to
policy reserves
- Amortised cost
legislation in 2002.
Allowed only when
fluctuation is deemed
temporary.
(Note) Current value
must be disclosed.
- Prospective
(prudent assumptions)
The maximum discount
rate is fixed
Technical provisions
cannot be below the
surrender value
Lock in
Additional reserves
must be added, if
deemed insufficient
after the future cash
flow analysis
12
Workshop on international accounting
V. Questions
Please discuss the following questions in your group
and make a brief presentation. (5 minutes for each group)
1) Which of your jurisdictions have already used or
plan to use international accounting standards?
(Note: The proposals may have an immediate impact in such jurisdictions. )
2) What are existing accounting practices for insurers
in your jurisdictions?
3) What would be your implications if the proposed
accounting changes should be adopted?
1) IAS39 and JWG
2) Phase I and Phase II
2 May 2003
13
Workshop on international accounting
References
• IASB Project summaries
– IASB Project summary – Insurance Contracts (phase 1)
(Latest revision: 2003/04/07)
– IASB Project summary – Insurance Contracts (phase 2)
(Latest revision: 2003/02/03)
• Use of IAS Around the World
– http://www.iasb.org.uk
(Latest version 2002/07/11)
• IAIS comment letters to the IASB
– http://www.iaisweb.org
2 May 2003
14
Workshop on international accounting
Annex: Existing accounting practice for insurers
Country
Securities
held by
insurers
Stocks
Stocks
Stocks
Stocks
Stocks
Stocks
Stocks
Bonds
Bonds
Bonds
Bonds
Bonds
Bonds
Bonds
Technical
provisions
2 May 2003
15
Workshop on international accounting