International Financial Reporting for Insurance Contracts

1. International Financial Reportingfor Insurance Contracts 2003 Bowles’ Symposium Sam Gutterman

2. Agenda • Background • Status • Outstanding issues • Future

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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?