2004 Caribbean Actuarial Association Meeting December 13, 2004

1
2004 Caribbean Actuarial Association
MeetingDecember 1-3, 2004

• International Financial Reporting Standards for
  Insurance Companies
• Thursday 1115 am December 2, 2004
• David Congram

International Financial Reporting Standards for
Insurance Companies
2
Factors Influencing International Financial
Reporting
Demands of the Capital Markets
Consolidation Demutualization of the
Insurance Sector
Financial Service Failures
Economic Globalization
Penrose/Morris Sarbanes Oxley JPS challenged
One Financial Regulator Basle Accords
International Standards
Labor Challenges Independence Surplus
3
Application of New Accounting Rules

• As early as 2005 for IFRS reporting companies.
  This includes EU-listed companies, Australia and
  the Caribbean
• FASB in the USA has stated its intention to
  converge GAAP with IFRSs

4
Adoption of IFRS/IAS Canada

• Canada is not adopting IFRS/IAS as Canadian
  GAAP yet
• They have stated their intentions to do so when
  Phase 2 for insurance contracts is completed
• CICA move to convergence with IFRS/IAS is
  underway
• Have exposed their own version of IAS 39 for
  financial instruments

5
Primary International Standards Affecting
Insurance Companies

• IFRS 4, adopted March 2004 (effective 1st qtr
  2005 for IFRS reporting companies)
• IAS 32 and 39, Amended December 2003
• Existing IAS 18 Revenue (Service Contracts)

6
Primary Provisions of IFRS 4

• Applies to Insurance Contractsmust have
  significant insurance risk
• Insurance contracts accounted under local GAAP,
  with certain restrictions (generally deferral and
  matching)
• Embedded derivatives at fair value (similar to
  FAS 133 treatment)
• Liability adequacy test
• Insurance contract liabilities may be adjusted
  for changes in interest rates

7
IAS 32 39 Application Assets And Investment
Contracts

• Most other contracts held by insurance companies
  are investment contracts (do not meet definition
  of insurance)
• Held as amortized cost if considered held to
  maturity otherwise at fair value (with demand
  deposit floor)

8
IAS 32 39 Application Assets And Investment
Contracts (cont)

• Most insurance company assets are financial
  instruments and are covered under IAS 32 39
• Generally deemed available for sale and held at
  fair value
• If deemed held to maturity could be carried as
  amortized cost, consistent with treatment of
  deposit contracts and most insurance
  contractsseldom done
• Generally consistent with current US GAAP

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Service Contracts

• Generally, contracts that are neither insurance
  contracts or investment contracts are service
  contracts
• Claim service contracts (ASOs)
• Self insurance of first layer of group coverage
• Service component of an investment contract is to
  be separated
• Covered by IAS 18

10
Review IAA Exposure Drafts
IASP Class 4 - Practice Guidelines

• Actuarial Practice
• Contract Classification
• Measurement
• Liability Adequacy Testing
• Changes in Accounting policy

• Embedded Derivatives
• Discretionary Participating Features
• Current Estimates
• Disclosure
• Reinsurance
• Stochastic Models

11
Review IAA Exposure Drafts Actuarial Practice

• Specific guidance
• Disclosures
• Scope and adequacy of Professional Services
• Accounting requirements
• Classification
• Unbundling and Embedded derivative separation
• Measurement
• Participation
• Liability Adequacy Test
• Accounting Disclosure
• Relevant Knowledge
• Material Inconsistencies
• General guidance

12
Review IAA Exposure Drafts Classification Paper
IAS 18 Service Contract Measurement
Create financial assets or liabilities?
Significant insurance risk
No
No

Yes
Yes
Service Element
IFRS 4 Insurance
Contains Discretionary Participation Feature?
Yes
Contains service elements
No
Tests
Financial Instrument
Embedded Derivative Test
Tests
Tests
IAS 39 Financial Instrument Measurement
Deposit Component
Financial Instrument
13
Review IAA Exposure Drafts Measurement

• Measurement approaches addressed
• Amortised Cost model
• Fair Value model
• Stage of completion
• Structure
• Approach
• Models and assumptions
• Updating
• Accounting Constraints

14
Revised IAS 39 Measurement
YES
Financial Instrument
Derivative
Host
YES
NO
Contains Embedded Derivatives
Amortised Cost
Amortised Cost
NO
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Liability Adequacy Testing

• Insurance Contracts and Investment contracts
  with Discretionary Participation Features (DPF)
• IAS 37 applies if accounting policy does not meet
  minimum requirements
• Application to pre tax/direct business
• Where Investment Contracts with DPF classified as
  only liabilities. (When partially assigned to
  surplus additional requirements)
• Service Contracts
• IAS 16 Asset Recoverability
• IAS 37 Onerous contracts

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Other Practice Guidelines

• Liability Adequacy Testing
• Changes in Accounting policy
• Embedded Derivatives
• Discretionary Participating Features
• Current Estimates
• Disclosure
• Reinsurance
• Stochastic Models

17
Questions