Transcript International Financial Reporting Developments

PD-3
International Developments
CIA Annual Meeting
Mike Lombardi
Vancouver
June 28, 2007
© 20074 Towers Perrin
Agenda
 International GAAP
 Who’s Who
 International Accounting Standards Board (IASB)
 International Actuarial Association (IAA)
 Key Issues
 CIA response
 Principles-Based Reserves
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Who’s who?
AAA
ACLI
AcSB
AICPA
AMF
ASB
CAPSA
CIA
CICA
CLHIA
FASB
FSCO
GNAIE
IAA
IASB
IBC
IFAC
IFRS
IOPS
IOSCO
NAIC
OSC
OSFI
PCI
SEC
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American Academy of Actuaries
American Council of Life Insurers
Accounting Standards Board
American Institute of Certified Public Accountants
Autorité des Marches Financiers
Actuarial Standards Board (CIA or AAA)
Canadian Association of Pension Supervisory Authorities
Canadian Institute of Actuaries
Canadian Institute of Chartered Accountants
Canadian Life and Health Insurance Association
Financial Accounting Standards Board
Financial Services Commission of Ontario
Group of North American Insurance Enterprises
International Actuarial Association
International Accounting Standards Board
Insurance Bureau of Canada
International Federation of Accountants
International Financial Reporting Standards
International Organization of Pension Supervisors
International Organization of Securities Commissions
National Association of Insurance Commissioners
Ontario Securities Commission
Office of the Superintendent of Financial Institutions
Property Casualty Insurers of America
Securities and Exchange Commission
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Who’s who (cont’d)
Canada
CIA
ASB
USA
AAA
ASB
International
IAA
IAA (Council)
Accountants members
standards
CICA
AcSB
AICPA
FASB
IFAC
IASB
Regulators
OSC/AMF
SEC
OSFI/AMF
NAIC
CAPSA/OSFI/FSCO US Dept of Labor
IOSCO
IAIS
IOPS
Industry
CLHIA/IBC
ACLI/PCI
GNAIE/CFO Forum
Accounting Standard
Canadian GAAP
US-GAAP
IFRS
Actuaries
members
standards
Securities
Insurance
Pension
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IASB – International Accounting Standards Board
 Based in London
 Started in 2001
 Successor to IASC
 Members
 14 members from 9 countries
 Purpose
 “Committed to developing, in the public interest, a
single set of high quality, global accounting
standards that require transparent and comparable
information in general purpose financial
statements”
 Publishes
 International Accounting Standards (IAS) and
 International Financial Reporting Standards (IFRS)
— synonymous – IAS were published earlier than
IFRS
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IFRS around the world
Countries
Change
Total
in 2005
in 2006
in 2006
IFRS permitted
23
0
23
IFRS required
65
+1
66
6
0
6
94
+1
95
(for all domestic companies)
IFRS required
(for some domestic companies)
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Why a project on insurance
 No existing IFRS for insurance
 Those that do exist exclude
insurance
 National diversity of practices
 Divergence from other sectors (e.g.
banking)
 Lack of transparency
 Insurance difficult to understand
 Need to open up the actuarial
“black box”
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History - Insurance project
 IASC
 Started project in 1997
 December 1999 published an Issues
Paper
 December 2000 Joint Working Group
released paper on “Financial
Instruments and Other Items”
 IASB
 Was formed in 2001
 Released early sections of Insurance
DSOP in November 2001
 IAA
 Started project to support insurance
IFRS with international actuarial
guidance - 2002
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More recent developments

EU

Adopted regulation requiring IAS and IFRS effective
January 1, 2005 for all publicly traded companies

IASB
 Phased approach defined by IASB for insurance IFRS in
May 2002
— Phase I
— Phase II

Phase 1
 (Intent is to put some components in place for savings
products, but to postpone review of protection products)
— presentation and disclosure
— application of IAS 39, as revised
— reinsurance reporting
— elimination of existing practices incompatible with
Framework, e.g. catastrophe and equalization
provisions

Phase II
— full insurance standard in place
— likely to involve more field testing
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Background - timetable
1997
1999
2000
2001/2
2002
2003
2004
2005
2006
2010+
Interim
Period
IASB Insurance
Accounting project
138
responses
Issues paper
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Implementation
of Insurance
IFRS
Phase II
Limited
Revisions
to IAS 32/39
proposed
Draft Statement
of Principles
Implementation
of Phase 1
Exposure
Draft of
Insurance
IFRS
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IFRS/IAS for Insurance
 IFRS/IAS apply to “insurance contracts” not to
industries or firms
 Special definition of insurance contract
 Not all contracts written by insurers are
“insurance contracts”
 Contracts written by US and Canadian insurers
would be covered under:
 IFRS 4 – Insurance Contracts
 IAS 39 – Financial Instruments
 IAS 18 – Service Contracts
 Some contracts (example: seg funds) could be
unbundled into several components which are
covered by more than one of the above standards
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IFRS/IAS for Insurance (cont’d)
Assets
Liabilities
Insurance Contracts
Phase I
(2005)
Phase II
(2010 ?)
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Investment Contracts
IFRS 4
IAS 39 for
Invested
Assets
IAS 39
and
IAS 18
Phase II
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International Actuarial Association (IAA)
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The International Actuarial Association
 Founded in 1895
 Became in 1998 an association of actuarial
associations to encourage development of a global
actuarial profession
 Represents the profession before global
organizations (example IASB, IAIS, IOSCO, WTO)
 Fully qualified actuaries: 40,000+ in 97 countries
 55 full members, 21 observer members
 Criteria for full membership include
 Code of professional conduct
 Discipline
 Education
 Due process
 IAA can develop standards and guidance, but does
not exercise disciplinary authority over individual
members (subsidiarity principle)
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The International Actuarial Association
Objectives
 Develop the role and reputation of the profession
 Promote high standards of professionalism to serve
public interest
 Advance the body of knowledge of actuarial
science
 Further the personal professional development of
actuaries
 Promote mutual esteem and respect amongst
actuaries
 Provide discussion forum for actuaries and
associations
 Represent the global profession with supranational
bodies
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IAA Standards
 IAA produces different classes of
standards
 Class 1 – mandatory
 Class 2 – voluntary
 Class 3 – recommended
 Class 4 – “practice guidelines”
 All standards must first be
mandatory
voluntary
recommended
“practice guidelines”
introduced as Class 4, to give time
for practices to develop before
becoming binding
 IAA due process for adoption of
standards includes a 4-month
exposure period
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IAA Standards for Insurance
 IAA is developing guidelines called
International Actuarial Standards of
Practice (IASP) to assist actuaries in
implementing IFRS 4, IAS 39 and IAS
18 for contracts written by insurers
 11 papers to date
 Actuarial practice
 Measurement of investment
contracts and service contracts
 Current estimates
 Contract classification
 Changes in accounting policy
 Discretionary participation





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features
Liability adequacy testing
Embedded derivatives
Business combinations
Disclosure
Reinsurance
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Insurance Issues
IASB Phase II
 Asset and liability measurement
 Definition of liability discount rate
 Exit vs. entry value
 Renewal premiums
 Unit of account
 CSV floor
 Own credit risk
 Par surplus
 Market Value Margins
 Policyholder behaviour
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Insurance Issues (cont’d)
CICA perspectives

Canadian Accounting Standards Board (AcSB) is not adopting international
standards as Canadian GAAP (yet)
 CICA intends to do so when Phase II for insurance contracts is complete
 Meanwhile,
— it will not stray further from US GAAP
— It is counting on the convergence of IASB and FASB

CICA convergence with IFRS is underway and should be completed in 5 years
 Adopting a version of IAS 39 effective reporting periods after October 1, 2006
(section 3855)

Post 2011
 IFRS will apply to public companies (including all insurers)
 CICA may still reserve for itself a role in setting accounting standards for
private companies and not-for-profit entities (not yet decided)
 Current CICA standards allow some exceptions from Canadian GAAP for
these entities
 However, CICA would no longer control IASB evolving standards and expects
to deal with some significant accommodation issues once Canadian GAAP
becomes IFRS.
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Insurance Issues (cont’d)
OSFI perspectives
 Canada is only major jurisdiction in which GAAP and regulatory reporting
are same. Can this continue?
 How to adjust for IASB decisions with which OSFI disagrees?
 How will OSFI give force to actuarial standards?
 Where will guidance come from on Market Value Margins? Canadian
MfAD approach is seen by international community as too subjective.
 Where to draw line between margins and required capital?
 What are the implications for Canadian regulatory regime (Appointed
Actuary role, peer review, DCAT, etc.)
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Insurance Issues (cont’d)
CIA perspectives

What will be the role of CIA in setting standards for its members?
 Education notes to expand on IASB standards and IAA Practice Notes?
 Turning IAA guidance into binding standards?
 Statutory Standards of Practice?

How should CIA be structured to deal with the changing environment? In
particular, what is the role of the Practice Council and the practice committees?

Canadian GAAP will move to IFRS in 5 years. IASB does not envisage or require
any “Appointed Actuary” sign-off, so non-FCIAs and non-actuaries may begin
taking on significant roles. In this environment,
 How does the CIA maintain the image and reputation of the actuary?
 What does this mean with respect to
— Continuing Professional Development,
— practice certificates, and
— discipline?

Will membership numbers decline? What are the implication with respect to
financial resources and the ability of the CIA to fulfill its mandate?
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CIA Response
 Policies
 Presidential representation
 CIA representatives on key IAA Committees
 Committees and Task Forces
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Key Principles of PBR
 Captures all of the material risks, benefits and guarantees
associated with the contracts, including “tail risk” and the funding
of the risks
 Utilizes risk analysis and risk management techniques to quantify
the risks; may include stochastic models
 Incorporates assumptions and methods that are consistent with
those used in the overall risk management process
 Permits the use of company experience to establish company
specific assumptions
 Provides for the use of assumptions set on a prudent estimate
basis that contain an appropriate level of conservatism when
viewed in the aggregate
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Basic PBR Framework
 Basic Framework-Life
 Methodology and Assumptions
 Life reserves (LRWG)
 Deterministic reserves
 Stochastic reserves
 Recent Changes
 Outstanding LRWG technical issues
 LRWG priorities in 2007
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Basic PBR Framework (cont’d)
 Basic Framework-Variable Annuities (VA)
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Basic PBR Framework (cont’d)
 Annuity Reserve Working Group (ARWG)
 C-3 Phase I Fixed annuities
 C-3 Phase 2 Updates
 New RBC models in development
 Other PBR activities
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