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Preparing for Fair Value

Preparing for Fair Value. 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.”

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Preparing for Fair Value

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  1. Preparing for Fair Value 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 PerrinGareth Kennedy, Manager, Ernst & YoungScott Lewis, CPA,Vice President, The Hartford 2008 CLRS – September 18, 2008

  2. What is fair value (for a liability) ? • 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.

  3. What is fair value (for a liability) ? 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

  4. Where does “fair value” apply? • 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. “

  5. Current debates • 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.)

  6. Panelists Bruce Fell, Principal, Towers Perrin Gareth Kennedy, Manager, Ernst & Young Scott Lewis, CPA,Vice President, The Hartford

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