DevelopmentsDevelopments inin InternationalInternational AccountingAccounting StandardsStandards forfor InsuranceInsurance CompaniesCompanies DavidDavid CongramCongram September 6, 2007 1 AgendaAgenda •• BackgroundBackground •• TimeTime tabletable •• PhasePhase 11 •• PhasePhase 22 – Measurement Attribute – Building blocks •• ItemsItems notnot addressedaddressed •• RelatedRelated projectsprojects 2 WhyWhy isis thethe InsuranceInsurance ProjectProject aa TopTop Priority?Priority? •• IndustryIndustry historicallyhistorically mutualmutual inin formform •• FinancialFinancial reportingreporting largelylargely dictateddictated byby nationalnational regulatorsregulators (solvency(solvency driven);driven); financialfinancial reportingreporting modelsmodels quitequite differentdifferent aroundaround thethe worldworld •• IndustryIndustry nownow demutualized;demutualized; raisingraising capitalcapital acrossacross bordersborders •• NoNo commoncommon regulationregulation // capitalcapital formulaformula withoutwithout aa commoncommon financialfinancial reportingreporting basisbasis •• IfIf thethe insurersinsurers adoptadopt fairfair valuevalue standard,standard, thenthen banksbanks mightmight asas wellwell 3 TheThe PlayersPlayers •• InternationalInternational AccountingAccounting StandardsStandards BoardBoard (IASB)(IASB) •• InternationalInternational ActuarialActuarial AssociationAssociation (IAA)(IAA) •• InternationalInternational OrganizationOrganization ofof SecuritiesSecurities CommissionsCommissions (IOSCO)(IOSCO) •• InternationalInternational AssociationAssociation ofof InsuranceInsurance SupervisorsSupervisors (IAIS)(IAIS) •• NationalNational StandardStandard SettersSetters –– Convergence?Convergence? 4 WhyWhy InternationalInternational FinancialFinancial ReportingReporting Standards?Standards? •• IFRSIFRS isis becomingbecoming thethe basisbasis ofof GAAPGAAP inin mostmost majormajor jurisdictionsjurisdictions outsideoutside NorthNorth AmericaAmerica •• IFRSIFRS areare principlesprinciples--basedbased standards,standards, asas opposedopposed toto rulesrules--basedbased standardsstandards (e.g..(e.g.. USUS GAAP)GAAP) •• ManyMany companies,companies, includingincluding insurers,insurers, alreadyalready reportreport upstreamupstream onon thisthis basisbasis 5 IFRSIFRS –– MovingMoving TowardsTowards aa GlobalGlobal StandardStandard Fixed deadlines for IFRS implementation US-GAAP - Convergence intended Convergence plans No intent to converge with IFRS 6 Source KPMG InternationalInternational convergenceconvergence –– USUS FASBFASB andand IASBIASB •• MemorandumMemorandum ofof UnderstandingUnderstanding –– FASBFASB andand IASBIASB pledgedpledged toto useuse theirtheir bestbest effortsefforts to:to: •• make existing financial reporting standards fully compatible as soon as is practicable; and •• coordinate future work programs to ensure that compatibility is maintained. 7 InternationalInternational ConvergenceConvergence ProjectProject –– USUS SECSEC SECSEC ChairmanChairman ChristopherChristopher CoxCox ––JulyJuly 2525 20072007 ““HavingHaving aa setset ofof globallyglobally acceptedaccepted accountingaccounting standardsstandards isis criticalcritical toto thethe rapidlyrapidly acceleratingaccelerating globalglobal integrationintegration ofof thethe worldworld capitalcapital marketsmarkets”” –– ConceptConcept ReleaseRelease forfor publicpublic commentcomment –– AllowingAllowing USUS IssuersIssuers prepareprepare onon IFRSIFRS forfor SECSEC purposespurposes ThisThis followsfollows thethe JuneJune 20072007 proposalproposal –– ProposalProposal toto eliminateeliminate thethe requirementrequirement onon foreignforeign privateprivate issuersissuers usingusing IFRSIFRS toto reconcilereconcile toto USUS GAAPGAAP 8 InsuranceInsurance ProjectProject TimeTime tabletable IASC IASB Insurance Project Steering Advisory Insurance Committee Committee Working Group Phase I Phase II Issues IFRS 4 Start Paper DSOP ED 5 IFRS 4 Phase II 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Split Discussion ED X Application of Project Paper Discussion Source KPMG With FASB 9 IFRSIFRS PhasePhase II ------>>> PhasePhase IIII Assets Liabilities All Insurance Other Investment Contracts and Investment Contracts and All Contracts with Discretionary Service Contracts Participation Features Phase I IFRS 4 (2005) IAS 39 and IAS 39 for Status Quo some Invested aspects in Assets IAS 32 and IAS 18 Phase II Phase II (20??) Source E&Y 10 PrimaryPrimary ProvisionsProvisions ofof IFRSIFRS 44 •• IFRS 4 defines insurance contracts: “contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder” •• IFRS 4 allows insurance contracts to be accounted under local GAAP, with certain restrictions •• Liability adequacy tests required •• Certain existing practices may continue in Phase 1 • Requires a wide range of disclosures on insurance contracts: – Risk selection and risk concentrations – Sensitivity analysis 11 IASIAS 32&3932&39 –– FinancialFinancial InstrumentsInstruments •• Covers measurement of asset side of the balance sheet •• Covers financial instrument component of investment contracts – GICs, term certain annuities •• Election as “held for trading” or not •• Held for trading measured at fair value; others measured at amortized cost – Any embedded derivatives at fair value – Amortized cost based on effective interest rate – DAC prohibited 12 IASIAS 1818 –– ServiceService ContractsContracts •• Covers contracts service component of investment contracts and other contracts that are not financial instruments – ASO contracts etc •• Matching of revenue and expense •• DAC allowed but more restrictive definition than US GAAP 13 IAAIAA InsuranceInsurance ActuarialActuarial PracticePractice GuidelinesGuidelines • IASP 2 Actuarial Practice • IASP 3 Classification of Contracts • IASP 4 Measurement • IASP 5 Current Estimates • IASP 6 Liability Adequacy Testing • IASP 7 Discretionary Participation Features • IASP 8 Changes in Accounting Policies Introduced July 25, 2005 • IASP 9 Accounting for Reinsurance Contracts • IASP 10 Embedded Derivatives and Derivatives Introduced June 11, 2007 14 ReviewReview IAAIAA ExposureExposure DraftsDrafts ClassificationClassification PaperPaper IAS 18 Significant Create financial Service Contract insurance risk assets or liabilities? No No Measurement Yes Yes Service Element IFRS 4 Contains Insurance Yes Discretionary No Contains Participation service elements Tests Feature? Financial Embedded Instrument Derivative Test Tests IAS 39 Financial Instrument Deposit Component Financial Instrument Measurement 15 ReviewReview IAAIAA ExposureExposure DraftsDrafts MeasurementMeasurement •• MeasurementMeasurement approachesapproaches addressedaddressed •• Amortised Cost model •• Fair Value model •• Stage of completion •• StructureStructure •• Approach •• Models and assumptions •• Updating •• Accounting Constraints 16 IFRSIFRS PhasePhase II ------>>> PhasePhase IIII Assets Liabilities All Insurance Other Investment Contracts and Investment Contracts and All Contracts with Discretionary Service Contracts Participation Features Phase I IFRS 4 IAS 39 and (2005) Status Quo IAS 39 for some Invested aspects in Assets IAS 32 and IAS 18 Phase II Phase II (20??) Source E&Y 17 PhasePhase IIII DiscussionDiscussion PaperPaper • Issued May 2007; comment period November 16, 2007 • Presents tentative decisions to date by IASB • Has considered input by a number of interest groups, such as IAA, CFO Forum, GNAIE, and IAIS • Process will lead to final standard, replacing IFRS 4 Insurance Contracts 18 PhasePhase IIII DiscussionDiscussion PaperPaper -- ObjectivesObjectives • Insurance to be subject to the same general principles as other financial services firms • Principles-based approach with additional guidance • Consistency of treatment between insurance, investment management and banking products 19 FeaturesFeatures ofof IASBIASB’’ss proposedproposed measurementmeasurement modelmodel •• SingleSingle measurementmeasurement modelmodel:: LifeLife insuranceinsurance andand nonnon--lifelife insuranceinsurance •• ProspectiveProspective valuation:valuation: ValueValue ofof insuranceinsurance contractcontract == PVPV (all(all futurefuture cashcash flows)flows) •• CurrentCurrent exitexit valuevalue:: TheThe amountamount thethe insurerinsurer wouldwould expectexpect toto paypay toto anotheranother entityentity ifif itit transferredtransferred allall itsits remainingremaining contractualcontractual rightsrights andand obligationsobligations immediatelyimmediately 20 PreliminaryPreliminary viewsviews ofof thethe IASBIASB expressedexpressed inin thethe discussiondiscussion paperpaper Issue IASB preliminary view Measurement attribute Current exit value - single approach for all insurance Discount rate Observable market rates for similar cash flows Unit of account Risk margins determined on portfolio basis Initial measurement Day one profits may be recognised Subsequent measurement All changes in estimates recognised immediately Policyholder behaviour Recognise future premiums only if certain tests are met Acquisition costs Acquisition costs are expensed as incurred Unbundling Unbundle deposit and service components unless interdependent Participating contracts Par component is a liability if a legal or constructive obligation exists Own credit risk Included in the liability measurement