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Dynamics in Accounting and Auditing related to Insurance Supervision . Peter Cooke, Member of Secretariat International Association of Insurance Supervisors 16 May 2006. Outline of Presentation. Introduction to IAIS and its working parties on accounting issues Insurance Core Principles

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dynamics in accounting and auditing related to insurance supervision

Dynamics in Accounting and Auditing related to Insurance Supervision

Peter Cooke, Member of Secretariat

International Association of Insurance Supervisors

16 May 2006

IAIS Overview and Activities related to Accounting

outline of presentation
Outline of Presentation
  • Introduction to IAIS and its working parties on accounting issues
  • Insurance Core Principles
  • IFRS from perspective of insurance supervisors
  • Insurance Contracts Phase I
  • Insurance Contracts Phase II
  • Supervisory Framework and roadmap for solvency assessment

IAIS Overview and Activities related to Accounting

international association of insurance supervisors
International Association of Insurance Supervisors

IAIS objectives:

  • cooperate to contribute to improved supervision of the insurance industry on a domestic and international level in order to maintain efficient, fair, safe and stable insurance markets and for the benefit and protection of policyholders
  • promote development of well regulated insurance markets
  • contribute to global stability

IAIS Overview and Activities related to Accounting

iais primary activities
IAIS Primary Activities
  • Develop international standards for insurance supervision
  • Assist supervisors in implementation of standards
  • Promote cooperation between insurance supervisors
  • Coordinate with other financial sector and international organisations

IAIS Overview and Activities related to Accounting

iais organisation chart as of april 2006
IAIS organisation chart(as of April 2006)

General Meeting

Executive Committee

Secretariat

Budget Committee

Financial Outlook Task Force

Technical Committee

Implementation Committee

Regional Coordination Subcommittee

Solvency & Actuarial Issues Subcommittee

Insurance Laws, Regulations, Practices

& Standards Subcommittee

Enhanced Disclosure Subcommittee

Task Force on Insurance Core Curriculum

Financial Conglomerates Subcommittee

Insurance Fraud Subcommittee

Pension Coordination Group

Reinsurance and Other Forms of Risk Transfer Subcommittee

ACCOUNTING SUBCOMMITTEE

INSURANCE CONTRACTS SUBCOMMITTEE

Reinsurance Transparency Group

IAIS Overview and Activities related to Accounting

iais working parties on accounting
IAIS working parties on accounting

Insurance Contracts Subcommittee

  • IASB projects:
    • Insurance Contracts (Phase II - valuation of insurance liabilities for general purpose accounting)
    • Financial instruments
    • Revenue recognition
    • Chaired by Rob Esson (US)

IAIS Overview and Activities related to Accounting

iais working parties on accounting7
IAIS working parties on accounting

Accounting Subcommittee

  • IASB projects not covered by Insurance Contracts Subcommittee
  • Currently undertaking survey on impact of IFRS 4 implementation upon supervisors
  • Auditing
  • Liaison with other bodies, and any other accounting-related issues
  • Chaired by Tomoko Amaya (Japan)

IAIS Overview and Activities related to Accounting

iais standard setting process
IAIS Standard Setting Process
  • Two tier approach

Core Principles

Principles

Supervisory Standards

Guidance & Issues Papers

IAIS Overview and Activities related to Accounting

insurance core principles
Insurance Core Principles

Most relevant to Accounting:

  • ICP 20: Liabilities
  • ICP 21: Investments
  • ICP 23: Capital adequacy & solvency
  • ICP 26: Information, disclosure & transparency towards the market

IAIS Overview and Activities related to Accounting

insurance core principles10
Insurance Core Principles

ICP 20: Liabilities

  • The supervisory authority requires insurers to comply with standards for establishing adequate technical provisions and other liabilities, and making allowance for reinsurance recoverables.
  • The supervisory authority has both the authority and the ability to assess the adequacy of the technical provisions and to require these provisions be increased, if necessary.

ICP 21: Investments

  • The supervisory authority requires insurers to comply with standards on investment activities.
  • These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management

IAIS Overview and Activities related to Accounting

insurance core principles cont
Insurance Core Principles (cont)

ICP 23: Capital adequacy & solvency

  • The supervisory authority requires insurers to comply with the prescribed solvency regime.
  • This regime includes capital adequacy requirements and requires suitable forms of capital that enable the insurer to absorb significant unforeseen losses

ICP 26: Information, disclosure & transparency towards the market

  • The supervisory authority requires insurers to disclose relevant information on a timely basis in order to give stakeholders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed

IAIS Overview and Activities related to Accounting

iais input to iasb
IAIS input to IASB

IAIS representation on IASB working groups:

  • Standards Advisory Council – member (Tomoko Amaya)
  • Insurance Working Group – 2 seats as official observer (Tomoko Amaya & Rob Esson)
  • Financial Instruments Working Group – official observer (Rob Esson)

Comment letters and papers

IAIS Overview and Activities related to Accounting

iais views on iasb standards
IAIS views on IASB standards
  • IAIS supports harmonised accounting principles
  • Consistent approach to measurement of assets and liabilities is essential to meaningful disclosure
  • IAIS would prefer consistent methodologies for regulatory and general-purpose financial reporting
  • IAIS is concerned about the possible mismatch in accounting models in phase I of IFRS 4
  • IAIS members unanimously against the use of own credit rating in measurement of liabilities

IAIS Overview and Activities related to Accounting

ifrs 4 iais survey on implementation
IFRS 4 – IAIS survey on implementation
  • Qualitative study by Accounting Subcommittee
  • Impact on supervisors of implementation of IFRS 4
  • Due for publication Q2 2006
  • Main themes from survey responses:
    • Definition of an insurance contract
    • ‘Mismatch’ between assets and liabilities

IAIS Overview and Activities related to Accounting

ifrs 4 iais survey on implementation15
IFRS 4 – IAIS survey on implementation
  • Main themes from survey responses (cont):
    • Catastrophe and equalisation provisions
    • Discretionary participation features
    • Impact of application of IAS 39

IAIS Overview and Activities related to Accounting

insurance contracts phase ii
Insurance Contracts Phase II

First ‘Liabilities Paper’ issued May 2005:

  • Preferable if the methodologies for financial and regulatory reporting are substantially consistent
  • Inappropriate for prudential regulatory purposes to require total financial resources (net liability plus equity) backing an insurance contract at less than its current surrender value
  • Allowing for own credit worthiness is inconsistent with the valuation of insurance liabilities in a going concern and unacceptable for both regulatory and general purpose financial reporting

IAIS Overview and Activities related to Accounting

insurance contracts phase ii17
Insurance Contracts Phase II

First ‘Liabilities Paper’ (cont):

  • Asset / Liability measurement consistency is especially important in the insurance sector
  • A bottom up approach is preferable but profit should only be recognised where an appropriate and sufficiently reliable risk margin has been provided for in the value of liabilities
  • Risk free discount rate utilising the entire yield curve is appropriate, except where the benefits are contractually dependent upon the performance of the underlying assets. For prudential purposes, expected earning rate should be verified against the discount rate

IAIS Overview and Activities related to Accounting

insurance contracts phase ii18
Insurance Contracts Phase II

Second ‘Liabilities Paper’ – draft under consultation, expected to be issued end May 2006.

Key principles and observations:

  • Measurement of an insurance liability should be based upon the future cash flows relating to full settlement with the claimant/beneficiary
  • The IAIS supports an approach to modelling whereby observable market inputs are used to the fullest extent possible, and the remaining elements are modelled.
  • A common framework is appropriate to model non-observable inputs as objectively as possible.
  • Where the amount or timing of future cash flows in uncertain, probability is a crucial factor in measuring the cash flows relating to the contract.

IAIS Overview and Activities related to Accounting

iasb insurance contracts project phase ii
IASB Insurance Contracts Project - Phase II
  • An exit model is preferable but profit on inception should be recognised only where an appropriate and sufficiently reliable risk margin in the liability measurement.
  • Similar obligations with similar risk profiles should redult in similar liabilities.
  • Any methodology for calculating the margin should share certain characteristics.
  • The margin should determined in such a way as to promote transparency and comparability between different insurers in an objective manner.
  • Probabilities which reflect policyholder behaviour regarding the contracts as a whole are needed to achieve meaningful results.
  • No requirement for application of surrender value floor to insurance liabilities for general purpose accounting.

IAIS Overview and Activities related to Accounting

insurance contracts phase ii20
Insurance Contracts Phase II
  • Future cash inflows should be taken into account in the measurement, if integral to the obligations under the contract.
  • Cash inflows should be offset against outflows
  • The IAIS would prefer full expensing of acquisition costs at inception with allowance for the future income to recover the costs taken into the measurement.
  • Discretionary benefits should be treated as liabilities based upon expected future cash flows, as treatment as equity would misrepresentthe financial position.
  • Derivatives embedded in insurance contracts should be taken into account in the valuation methodology.
  • The credit standing of an insurer is not relevant to the valuation of insurance liabilities.

IAIS Overview and Activities related to Accounting

iais framework for insurance supervision
IAIS Framework for Insurance Supervision

A new framework for insurance supervision:

Towards a common structure and common standards for the assessment of insurer solvency (Framework paper)

IAIS Overview and Activities related to Accounting

iais framework for insurance supervision22

Supervisory action

supervisory assessment and intervention

LEVEL 3

Regulatory requirements

financial

governance

market conduct

LEVEL 2

basic conditions for the effective functioning of

the insurance supervisory authority

LEVEL 1

Preconditions

the insurance sector and

insurance supervision

IAIS Framework for Insurance Supervision

IAIS Overview and Activities related to Accounting

iais common structure for solvency assessment
IAIS Common structure for solvency assessment

‘Cornerstones Paper’

  • Sets out key ‘cornerstones’ for regulatory financial requirements of supervisory framework (October 2005)

‘Roadmap Paper’

  • Workplan for the IAIS Solvency project (February 2006)

‘Structure Paper’ (in progress)

  • Outlines a more detailed philosophy on assessment of insurer solvency, and analysis of main aspects and elements

IAIS Overview and Activities related to Accounting

international association of insurance supervisors24
International Association of Insurance Supervisors

Sources of Information

  • Website www.iaisweb.org
  • Newsletter (quarterly)
  • IAIS published papers
  • Working party meetings
  • IAIS annual conference
  • Training seminars
  • Contact IAIS iais@bis.org

IAIS Overview and Activities related to Accounting

iais papers most relevant to accounting and financial assessment
IAIS papers most relevant to accounting and financial assessment

IAIS Overview and Activities related to Accounting

iais standard setting activities
IAIS Standard Setting Activities

Questions???

Thank you!!

peter.cooke@bis.org

IAIS Overview and Activities related to Accounting