ASSOCIATION ACTUARIELLE INTERNATIONALE INTERNATIONAL ACTUARIAL ASSOCIATION IASB Board Meeting June 22, 2006 Presented by Sam Gutterman, FSA, FCAS Chairman, IAA Committee on Insurance Accounting

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ASSOCIATION ACTUARIELLE INTERNATIONALEINTERNATIO
NAL ACTUARIAL ASSOCIATIONIASB Board
MeetingJune 22, 2006Presented by Sam
Gutterman, FSA, FCASChairman, IAA Committee on
Insurance Accounting
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Items to be covered

• The IAIS paper
• Other insurance regulatory issues
• Key issues needing further actuarial assessment

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The IAIS paper

• The IAA strongly supports the desirability of
  having one set of liabilities for regulatory and
  general purpose financial reports
• For that purpose, we encourage active dialogue
  between the IASB and the IAIS
• At a minimum, common definitions and methodology
• Any differences should be publicly explained
• Continued concern regarding effects of mismatch
  of measurement of assets and liabilities
• Appropriate disclosure is a key element in the
  success of any new measurement system

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The IAIS paper

• The liability for insurance contracts should be
  determined on a prospective basis, reflecting
• Current estimates
• Time value of money
• Appropriate risk margins
• Features and characteristics of the contract and
  the insureds
• All expected cash flows, including guarantees,
  options, embedded derivatives and embedded assets
• Observable market inputs should be used to the
  fullest extent possible

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The IAIS paper

• Both insurer and policyholder behavior should be
  reflected in recognition and measurement
• Imposition of a cash value floor is inconsistent
  with the recognition of policyholder behavior
• Similar or related contracts issued by an insurer
  should be measured using a consistent framework
• Measurement of the liability of insurance
  contracts should be consistent with that of
  long-term savings contracts
• Expected future cash flows from DPFs that
  retroactively adjust the price to reflect
  experience should be recognized in the liability
• Sensitive to the wide variety of participating
  contracts

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Other insurance regulatory issues

• In 2005 the IAA published the book A Global
  Framework for Insurer Solvency Assessment
• Describes the principles and methods involved in
  quantifying the total funds needed to provide a
  certain level of confidence to policyholders and
  shareholders that policyholders obligations will
  be satisfied
• Emphasizes a total balance sheet approach, for
  which liabilities and the income statement play
  an important role
• IAA members are currently assisting IAIS and
  Solvency II, regarding liabilities and solvency
  assessment

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Key issues needing further actuarial assessment

• The IAA currently has Working Groups established
  addressing
• Risk/profit margins, assessing
• Cost of capital approach
• Quantile (statistical) approach
• We do not expect to endorse a single method, but
  will explore the methods and limitations of both
  we expect an emerging convergence
• Use of internal models
• Relationship between actuaries, auditors and
  regulators
• Discretionary participation features in
  process of formation
• Will continue working with the IAIS on issues
  listed in paragraph 101 of their paper
• Concepts of economic capital and enterprise risk
  management are developing rapidly