accounting and general insurance miller
TRANSCRIPT
-
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
mailto:[email protected]:[email protected] -
8/12/2019 Accounting and General Insurance Miller
2/21
Overview
Terminology
Current practice IASB insurance project
Phase I changes (IFRS 4)
Phase II potential changes
-
8/12/2019 Accounting and General Insurance Miller
3/21
-
8/12/2019 Accounting and General Insurance Miller
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
-
8/12/2019 Accounting and General Insurance Miller
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
-
8/12/2019 Accounting and General Insurance Miller
6/21
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
-
8/12/2019 Accounting and General Insurance Miller
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
-
8/12/2019 Accounting and General Insurance Miller
8/21
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
-
8/12/2019 Accounting and General Insurance Miller
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
-
8/12/2019 Accounting and General Insurance Miller
10/21
Major phase I components
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
-
8/12/2019 Accounting and General Insurance Miller
11/21
Major phase I components
affecting P&C insurers (cont.)
Follow current local GAAP until phase II isissued, except:
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
-
8/12/2019 Accounting and General Insurance Miller
12/21
Major phase I components
affecting P&C insurers (cont.)
Follow current local GAAP until phase II isissued, except:
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.
-
8/12/2019 Accounting and General Insurance Miller
13/21
Major phase I components
affecting P&C insurers (cont.)
Follow current local GAAP until phase II isissued, except:
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
-
8/12/2019 Accounting and General Insurance Miller
14/21
Major phase I components
affecting P&C insurers (cont.)
Follow current local GAAP until phase II isissued, except:
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.
-
8/12/2019 Accounting and General Insurance Miller
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
-
8/12/2019 Accounting and General Insurance Miller
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.
-
8/12/2019 Accounting and General Insurance Miller
17/21
IFRS 4
Required Disclosures (cont.)
38 An insurer shall disclose information that
helps users to understand the amount, timingand uncertainty of future cash flows from
insurance contracts
-
8/12/2019 Accounting and General Insurance Miller
18/21
IFRS 4
Required Disclosures (cont.)
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
-
8/12/2019 Accounting and General Insurance Miller
19/21
IFRS 4
Required Disclosures (cont.)
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.
-
8/12/2019 Accounting and General Insurance Miller
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
-
8/12/2019 Accounting and General Insurance Miller
21/21
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.