Transcript Document

PD - 16
Developments on International
Accounting Standards From a P & C
and Life Perspective
Canadian Institute of Actuaries Annual Meeting
David Oakden
June 29, 2007
Overview of Risk Margins
• IASB - Preliminary Views on Insurance
Contracts
• IAA - Measurement of Liabilities for
Insurance Contracts: Current Estimates
and Risk Margins
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IASB Basic Building Blocks
• Estimate of future cash flows
• Time value of money
• Margin
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IASB Exit Value
• Amount the insurer would expect to
have to pay today to another entity if it
transferred all its remaining contractual
rights and obligations immediately to
that entity
• …excluding any payment for other rights
and obligations
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IASB Margin
• As required by market participants for
– Bearing risk
– Providing services
• Not a shock absorber
• More guidance is needed on calibration
5
IASB Risk Margin Approaches
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Confidence level
CTE
Canadian approach
Cost of capital
Based on CAPM
Adjustments to cash flows
Risk adjusted discount rate
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IASB Calibration of Margins
• Observed price to policyholder
– Price to policyholder is a reasonableness check
– Profit or loss at inception is permitted
• Unbiased estimate of third party
acquisition
– Business combination or portfolio transfer
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IAA - Current Estimate
Expected present value of
probability weighted cash flows
using current assumptions
Exit Value = Current Estimate + Margin
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Current Estimate Considerations
• All relevant expected cash flows are
included
• Consistent with financial reporting
standards
• Reflects observed market inputs
• Otherwise model-based estimates may
be used
• Unit of account is portfolio
– Similar risks
– Managed together
• Current estimates not current conditions
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Current Estimate Considerations
Ctd.
• Consistent assumptions
• Any significant asymmetry in cash flow
should be reflected
• Approximations can be used if impact is
small in relation to cost of a more
refined approach
• Alternate data sources may be used
where the actual data is inadequate
• Assumptions should be reviewed
systematically and revised when
appropriate
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IAA Risk Margin Approaches
• Cost of capital
– Apparent preferred approach
• Statistical Methods
– Quantile
– Conditional tail expectation
• Explicit assumption approaches
(Canadian method)
– May produce inconsistency between
• Assets and liabilities
• Insurance and other industries
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IAA High Risk Margin Situations
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Less information
Low frequency / high severity
Longer payment terms
Wider probability distribution
To the extent that emerging experience
reduces risk then risk margins should
decrease
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IAA Reference Entity
• To be consistent with an exit value
approach, it is reasonable to construct a
reference entity to which the portfolio
would be transferred
• The use of a reference entity would
promote increased comparability
between preparers’ financial statements
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IAA Reference Entity
• Large
– Process risk is as small as practical
• Multi-line / diversified
– Benefits of risk diversification
• Highly rated
– AA
• Business similar in nature
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IAA Cost of Capital
• Preferred method
• Cost of capital
– 4% to 6% (above the risk free rate) used to
illustrate the method
– Seems low by North American standards
– Wide range
• Capital
– IAA Blue Book
– Solvency II SCR
– More guidance needed
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IAA Sample Risk Margins
Capital
Cost of
Capital
Short Tail
Line of
Business
Long Tail
Line of
Business
35%
10%
6.3%
17.2%
70%
10%
12.6%
34.4%
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Questions
•?
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