Dynamics in Accounting and Auditing related to Insurance Supervision

Presentation Transcript

Peter Cooke, Member of Secretariat

International Association of Insurance Supervisors

16 May 2006

IAIS Overview and Activities related to Accounting

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

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 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 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 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 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 Standard Setting Process

Two tier approach

Core Principles

Principles

Supervisory Standards

Guidance & Issues Papers

Most relevant to Accounting:

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

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

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 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 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

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

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

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

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

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.

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.

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.