Accounting and General Insurance Miller

8/12/2019 Accounting and General Insurance Miller

1/21

Implications ofInternational Financial Reporting Standards

onProperty/Casualty Insurance Companies

Mary Frances Miller, FCAS, MAAAPresident, Casualty Actuarial Societyand

Principal, Select Actuarial Services

Nashville, Tennessee

[email protected]
mailto:[email protected]:[email protected]


2/21

Overview

Terminology

Current practice IASB insurance project

Phase I changes (IFRS 4)

Phase II potential changes


3/21


4/21

Current practice

No consistency across countries

Some countries have Equalization reserves

Catastrophe reserves

Some countries have neither

A few allow discounting, but most dont

Some countries require loss reserves to be set using a

fixed rule or formula


5/21

Current practice (cont.)

Some countries allow management to instead book

their best estimate

Some let regulator and solvency-related public policy

concerns determine local GAAP

Some have separate accounting rules for separate

regulator financial reports

Some show reserves net of reinsurance

Some show reserves gross of reinsurance, with ceded

amounts as an asset


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IASB Insurance Project

IASB made the insurance project a priority

Why?

-No consistency across the world

-No single standard viewed as ideal or preferred

-No current IAS standard on insurance

-EU wanted to adopt IAS by 2005

-Hence, an opportunity for IASB to provide leadership, and

-Needed to meet EU objective


7/21

IASB Insurance Project

How structured?-Tried to get done in one step

-Raced to meet 2005 deadline

-Decided it couldnt make the 2005 deadline

*Why?

*Fair value

*Several issues that are predominately life insurance oriented--Asset/liability consistency

--Deposit floor

--Renewal premiums

-Solution: Break it up into two pieces

*Phase Ipieces it could do by 2005*Phase II ieces that would take lon er


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Phase I changes (IFRS 4)

IFRS 4 issued 30 March 2004

Steps that could be taken by 2005:

- Limited improvements that could be made without risking major

reversals in phase II

- Enhanced disclosure requirements

Definition of insurance contract


9/21

Major phase I components

affecting P&C insurers

Follow current local GAAP until phase II is issued,

except:

1. No more catastrophe or equalization reserves (for

GAAP)

2. Reserves must be shown gross of reinsurance

Ceded reinsurance balances are now a separate asset


10/21


affecting P&C insurers (cont.)

Follow current local GAAP until phase II isissued, except:

3. Reserves must be tested (assessed) for adequacyat each reporting date

No lock-in of old assumptions

Any rule under current GAAP superceded by this test

Non-issue for those under U.S. GAAP


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4. Ceded reinsurance balances must undergo animpairment test

Reinsurance collectibility test

Should be a non-issue for those under U.S. GAAP,but not all may follow this practice


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5. Unbundling of deposit features required if deposit isboth

a.) Separable from rest of the contract, and

b.) the insurers accounting policies do nototherwise require it to recognize all obligations andrights arising from the deposit component

Example given in the standard that focusesspecifically on reinsurance.


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6. Insurer can decide to discount designated insuranceliabilities at current market rates

Intended to satisfy those worried about assets at market but

liabilities not at market

If elected, insurer must continue updating those liabilities sodesignated

at all future report dates

to reflect changes in market interest rates


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7. Reserves acquired through a business combinationmust be measured at fair value

Can split the fair value into two pieces

Acquired reserve under local GAAP

Adjustment to bring to fair value (intangible asset)

The subsequent measurement of this asset shall beconsistent with the measurement of the related insuranceliability

Not clear what this means. No guidance provided.


15/21

IFRS 4

Required Disclosures

36. An insurer shall disclose information that

identifies and explains the amounts in itsfinancial statements arising from insurance

contracts


16/21

IFRS 4

Required Disclosures (cont.)

37. To comply with paragraph 36, an insurer

shall disclose:

(d) the effect of changes in assumptions used to

measure insurance assets and insurance liabilities,

showing separately the effect of each change thathas a material effect on the financial statements.


17/21

IFRS 4


38 An insurer shall disclose information that

helps users to understand the amount, timingand uncertainty of future cash flows from

insurance contracts


18/21

IFRS 4


39 To comply with paragraph 38, an insurershall disclose

(c ) information about insurance risk (both before and after riskmitigation by reinsurance), including information about:

(i) sensitivity

(ii) concentrations of insurance risk.

(iii) claims development

Item (i) requires sensitivity analysis

Item (ii) requires disclosures about concentrationItem (iii) requires claim development triangle disclosures


19/21

IFRS 4


Claims development triangles- Q. How many years of development?

- A. The number of years that claim uncertainty lasts

*But need not be more than 10

*And need not show data prior to 5 years

before effective date

The IAA is developing actuarial standards ofpractice for these disclosure requirements.


20/21

Phase II potential changes

AssetLiability approach (and not deferral-

matching)No deferred acquisition cost asset

Revenue recognized as written

Unearned Premium reserve replaced by liability for

unexpired portion of policy

Discounted reserves


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Phase II potential changes (cont.)

Fair value, if workable in practice

Fair value would addRisk margins (or market value margins)

Credit risk adjustment after reflecting government

guarantees, etc.

Not yet clear if a fair value standard would bepractical in the real world

Planned exposure draftmid 2005.

Accounting and General Insurance Miller

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