actuary india oct 2011

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INDIAN ACTUARIAL PROFESSION

Serving the Cause of Public Interest



3Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India October 2011

C O N T E N T S

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C O N T E N T S

FROM THE CHIEF EDITOR

NICK TAKET

FROM THE PRESIDENT

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4 Indian Actuarial Profession Serving the Cause of Public InterestThe Actuary India October 2011

FROM THE CHIEF EDITOR

T he work carried out by actuaries has changed very signicantly over the last few decades. Today we

routinely carry out investigations and analyses that would have been unheard of 25 years ago. It might

be thought that this is a measure of how much actuarial science has developed in that time. However, in

practice I believe that the application of actuarial science has developed little. Most of the changes brought

about in actuarial practice have come about because of the huge amount of cheap computing power that

actuaries have at their disposal today.

It is not that our predecessors were not aware of the issues that we deal with today or that they ignored them, it

was just that they could not tackle them by the use of brute computing power as we do today. Instead they had

to rely more on their insights and judgement to nd solutions. I believe this made them more rounded actuaries,

who were better equipped to face the challenges that our profession will face in the future. By which I mean

they were forced to spend more time thinking deeply about and understanding the nancial risks and problems

they faced.

By contrast, today if a problem is complicated we tend to take the easy way out and simply write or run a

programme to show us the possible answers.

There are a number of dangers for the profession in this approach. It allows the belief to grow that actuaries are

simply people who use actuarial software, and it fails to promote the development and application of the skill

of judgement within our members.

There are already people outside the profession who think that actuaries are just number crunchers. In addition,

we must all at some point of time have heard employers or clients wonder why they have to have so many

actuaries, surely they could manage by buying some actuarial software and get the IT department to run it.

At a simple level this suggestion can be refuted by employing the old computer adage “Garbage in, garbage out”,which is true of any software. However, this does not address the fundamental problem which is as actuaries

what is our unique selling proposition?

To my mind our USP is our ability to use judgement and insight to simplify and nd solutions to complex nancial

and risk problems. Yes, we use actuarial software, but this is just one of the tools of our trade.

We add value not by running the software but using our judgement to decide

• when to use the software, and when not;

• what needs to be modelled, and what does not;

• what scenarios will be important, and which less so;

• what modications need to be made to products or schemes to achieve the result

required by the client; and so on.

Our use of judgement is a signicant value addition to our employers and clients, and we must

do all we can to promote this skill amongst the members of the profession. We need to ensure

that our education and examination system not only teaches the use of software tools, but alsoplaces a major emphasis on the development of the skills of judgement and insight. These

constitute our main USP and we ignore them at our peril.

Will we as a profession always be able to rely on these skills? This is a difcult question to

answer, but a simple analogy with chess gives some food for thought.

Many years ago it was believed that the number of possible moves in a chess game was just so large that a

computer would never be able to beat a human at chess.

But then computing power grew exponentially, and it was not long before the very best chess computers could

beat all but the very best chess grandmasters.

It was then believed that this situation would remain unchanged because although grandmasters do analyse

a huge number of possible future moves, their unique strength lies in their ability to discount future moves

that lead to ”weak” positions and focus only on those that lead to “strong” positions. If asked to dene “weak”

and “strong” positions grandmasters would become somewhat vague, but in essence it was a matter of them

exercising their judgement.

There the matter rested for a number of years, until computing moved on, not in computing power, but in the

ability to teach computers to judge “strong” and “weak” positions, so that now even the very best chess players

in the world can be beaten by the very best chess computers.

So does the same fate await the actuarial profession?

Possibly, but the analogy with chess is not perfect since chess is a game with

• a xed set of rules,

• a limited number of pieces with clearly dened roles,

• an unambiguous denition of victory.

Whereas actuaries operate in an environment in which

• the rules keep changing,

• there are a large number of stakeholders whose roles continue to evolve over time, and

• even the denition of victory varies between players!

This leads to sufcient complexity and uncertainty to ensure that actuaries should be able to hold the computers

at bay for a good few years to come.

Nick Taket

T H E C H I E F E D I T O R

F R O M




FROM THE PRESIDENT he 16th East Asian Actuarial Conference – lessons to learn from:

As I write (13 th Oct., 2011) in Kuala Lumpur the 16 th East Asian Actuarial Conference (16 th EAAC) is on

and will come to an end this evening. Organised by the East Asian Actuarial Congress (eaac), it’s the

16 th one held biennially and the very rst one too was in Kula Lumpur. For the Actuarial Society of Malaysia

it was a nostalgic memory to recall, one of the then Organising Committee members from Malaysia is still

around: he was “recognised” during the inaugural function on 11 th Oct., 2011.

Mr. Donald Joshua Jaganathan, Assistant Governor, Bank Negara Malaysia was there to inaugurate and deliver

Key Note address.

A bit of a nostalgia for us in IAI too -- Years 2003/04 were hectic for us as we worked hard to become a member

of the eaac and were admitted to it in the year 2005 during the 13 th EAAC in BALI, Indonesia. The eaac opened

its door for the rst time beyond the original NINE founding members. This was followed by Australia, thus the

eaac is now ELEVEN members TEAM.

Things are changing fast – the Global Economic down-turn triggered by US Subprime mortgage defaults in the

years 2007/08 ended in global debate and dialogue including the Actuarial Community lead by International

Actuarial Association (IAA). Was there a voice in this global debate and dialogue amongst the actuarial

community from Asia/Asia Pacic? Can not think of one! Not surprising to me atleast!

In the Asia/Asia Pacic we have to move fast: our economies are interlinked, social and cultural values are

intertwined as well.

A small though important step: the eaac Board of Eleven members met on 10 th

Oct., to decide amongst othermatters to have the EAAC once a year after the next one in Singapore in year 2013. The circle moves in

alphabetical order so the 18 th EAAC will be in Taiwan and probably India ill get its turn in the year 2018.

The 16 th EAAC, at the last count amongst 508 participants, had its member associations contributing;

Malaysia: 162, Singapore: 85, Indonesia: 62, Hong Kong: 54, South Korea: 44, Japan: 14,

Taiwan: 12 Thailand: 12, India: 11, Australia: 11, The Philippines: 8 Total eaac members:

475 Others: 33

India with student population of 12,000+, the highest amongst the eaac member countries,

surely could have done better.

The Appointed Actuary in India:

The IRDA circular dt. 5 th Sept., 2011 proposing changes to the IRDA (Appointed Actuary)

Regulation, 2000 has brought quite lot of agitative application of mind amongst the stakeholders: the Insurers, the IAI members particularly those who are Appointed Actuaries

and are adversely affected and hopefuls to serve as Appointed Actuaries. The position of

Appointed Actuary is and as much perceived as a position of importance and power within

the corporate structure of an Insurer. The Introduction of the Appointed Actuary system in the

year 2000 concurrently with the opening up of the insurance sector to private participation was

somewhat of an historical importance. It was aimed at as an effective system of regulatory instrument so as to

ensure nancial stability of the insurer: having enough money to enable it to pay policyholder liabilities as and

when these fall due and the insurer required to hold on to solvency level with adequate capital for writing new

business, fell on the shoulders of the Appointed Actuary. Neither the AA system implies that the insurers would

not have actuarial staff other than those required to support the role of the Appointed Actuary nor does it mean

that the insurance regulator, IRDA would not have actuarial staff to perform its regulatory role. The Appointed

Actuary concept sits rmly on the belief that the regulatory roles expected of the Appointed Actuary could not

be performed well if such person were not part of the corporate structure of the insurer, not even if he/she

were to operate from within the ofce of the Insurance regulator. Nevertheless such Appointed Actuary has his/

her primary loyalties to the insurance regulator. A sound legal structure for this to happen is essential besides

ensuring that professional standards required of the professional body of the Appointed Actuary are complied

with and strictly enforced. This latter role of the actuarial body has to be demonstrative so as to ensure public

and the regulator of required level of comfort on ongoing basis. In case of India has this happened?

Questions have been raised. Aside from the circular from IRDA proposing changes to the provisions of the

(Appointed Actuary) Regulations, after about a decade do we not sit up and examine;

i) the framework of rules against which we issue certicate of Practice,

ii) the adequacy of Actuarial Practice Standards (earlier called Guidance Notes) that Appointed Actuaries are

required to observe,

iii) the compliance mechanism to ensure that the Actuarial Practice Standards are indeed complied with and

disciplinary actions that should follow in case of non-compliance,

iv) capacity building programmes to support the Appointed Actuary on ongoing basis, and that the ethical

standards are understood and followed.

Last but not the least the IRDA proposal, the “Appointed Actuary shall not function in any capacity other

than Appointed Actuary in the ofce of the insurer” should in my view be a welcome proposal. The CFO and

T T H E P R E S I D E N T

F R O M




MARK YOUR DATES FOR THE UPCOMING EvENTS

Eent Organised by Date Place

6 th Current Issues in Retirement Benets PEBSS Advisory Group November 18-19, 2011 Mumbai

7 th Current Issues in Life Assurance Life Insurance Advisory Group November 24-25, 2011 Mumbai

1st Current Issues in General Insurance General Insurance Advisory Group December 2, 2011 Mumbai

16 th India Fellowship Seminar PEC Advisory Group December 15-17, 2011 Mumbai

6 th Current Issues in Health & Care Insurance Health & Care Insurance Advisory Group January, 19-20, 2012 Gurgaon

14 th Global Conference of Actuaries PSIR Advisory Group February 19-21, 2012 Mumbai

Contact Person: Aparajita Mitra ([email protected] )

The Institute of

Actuaries

of

India

announces

“IAI Connect”

Organised by:

Social, Cultural and Youth Affairs adisory group (SC&YA)

Date: 3rd Dec 2011

Time: 10 am to 3 pm

venue:

Sai Palace Hotels, Mahakali Caves Road, Chakala,Andheri East, Mumbai - 400093.

A N N O U N C E M E N T

the Appointed Actuary denitely have conicts of interest: Appointed Actuary determines the capital required for doing

or holding certain amount of business and the CFO has to ensure that such capital is available. The CRO identies and

measures all the risks that the insurers holds within, the Appointed Actuary measures some of these (but not all) and

reserves for. The conict of interest of the CEO with the role of the Appointed Actuary is obvious. The question is not that

these conicts of interest exist; of course these do but the question is that the role boundaries of these positions should

be designed to be non-overlapping and thus non-frictional. Responsibility for dening such role boundaries, which have

serious regulatory implications, can’t be left to the Board of Insurance Companies alone.

Liyauat Khan

Vide notication dated 26 July 2011 the Government of India has nominated

Shri Arind Kumar, Joint Secretary (Pension & Insurance)

as a member of the Council of the Institute of Actuaries of India to represent the

Ministry of Finance vice Mr. Tarun Bajaj, Ex- Joint Secretary (Banking and Insurance).Mr. Arind Kumar

• Bringing Institute closer to the student members through series of

interactive sessions

• Talk by a senior Fellow

• Exam dealing techniques by a recently qualied Fellow

• Industry overview or talk by an actuarial employer

For more details about the workshop and downloading the registra-

tion form, please visit www.actuariesindia.org . There are limited seats

for the event, so registration will be done on rst come rst serve basis.

For any other queries, please email [email protected] .




(Courtsey the Chartered Accountant Journal of ICAI.July 2011)

DIFFERENCES BETwEEN IFRSs aND Ind aS

T his note is issued by the Institute

of Chartered Accountants of India

(ICAI) to bring out the differences

between the IFRSs1 as applicable on

1st April, 2011 and the corresponding

Indian Accounting Standards (Ind ASs)

placed by the Ministry of Corporate

Affairs (MCA), Government of India,

on its website after recommendation

of the same by the National Advisory

Committee on Accounting Standards

(NACAS) and the ICAI.

The Ind ASs placed on the MCA website

when notied under Section 211 (3) (c)

of the Companies Act, 1956 by the MCA

will be applicable to the companies

from the date specied in the said

notication. Section I of the note

contains IFRSs deferred by the MCA.

Section II contains carve outs from

IFRSs in the relevant Ind ASs. Section III

contains ‘Other major changes in Indian

Accounting Standards vis-à-vis IFRSs

not resulting in carve outs’. Section IV

contains a comparative chart of IFRSs

and corresponding Ind ASs indicating,

inter alia, IFRSs in respect of which

no corresponding Ind AS has been

formulated and reasons therefor.

I. IFRSs deferred by the MCA

1. Ind AS 11, Construction Contracts

IFRIC 12 and SIC 29, Service

Concession Arrangements and

Service Concession Arrangements:

Disclosures, respectively, which are

included as Appendices A and B to

Ind AS 11, Construction Contracts,

respectively, would not be notied along

with the other standards and their

application has been deferred.

Reasons

MCA received feedback regarding the

adverse consequences which may

ensue to the Indian companies in the

event of immediate adoption of the

IFRIC 12. Hence, MCA decided that

Appendix A to Ind AS 11, corresponding

to IFRIC 12, Service Concession

Arrangements should be deferred and

the same may be examined and applied

with or without modication later. Appendix B to Ind AS 11, corresponding

to SIC 29, Service Concession

Arrangements: Disclosures, is related

to IFRIC 12. Therefore, it has also been

deferred.

2. Ind AS 17, Leases

IFRIC 4 Determining Whether an

Arrangement contains a Lease, which

is included as Appendix C to Ind AS 17,

Leases would not be notied alongwith

the other standards and its application

has been deferred.

Reasons

MCA received feedback regarding the

adverse consequences which may

ensue to the Indian companies in theevent of immediate adoption of the

Appendix C to Ind AS 17, corresponding

to IFRIC 4. Hence, MCA decided that

the Appendix should be deferred and

the same may be examined and applied

with or without modication later.

3. Ind AS 106, Exploration for and

Evaluation of Mineral Resources

Ind AS 106 corresponding to IFRS

6, Exploration for and Evaluation

of Mineral Resources, would not be

notied immediately as it is under

consideration of the Government.

Reasons

MCA is of view that the standard is open-

ended offering freedom to companies

to follow virtually any policy they like.

The standard does not prescribe any

standardisation. In such circumstances,

the standard does not serve any

useful purpose and may create a

wrong impression in the mind of the

stakeholders that the entity concernedhas complied with a strict standard

when in fact, the company is free to apply

any accounting treatment it wants. This

may even be counter productive from a

regulatory point of view by giving a false

sense of correctness. Hence, this Ind AS

may not be notied immediately.

II Care Outs

A. Carve-outs which are due to

differences in application of

accounting principles and practicesand economic conditions prevailing in

India.

1. Ind AS 21, The Effects of Changes

in Foreign Exchange Rates As per IFRS

IAS 21 requires recognition of exchange

differences arising on translation of monetary items from foreign currency

to functional currency directly in prot

or loss.

Care out

Ind AS 21 permits an option to

recognise exchange differences arising

on translation of certain long-term

monetary items from foreign currency

to functional currency directly in equity.

In this situation, Ind AS 21 requires

the accumulated exchange differences

to be amortised to prot or loss in an

appropriate manner. IAS 21 does not

permit such a treatment.

Reasons

(i) There is signicant uctuation in

the value of US dollar vis-à-vis rupee.

India plans for a large expenditure on

infrastructure. This may need a very

large inow in the foreign borrowings.

These borrowings are denominated in

foreign currencies unlike developed

countries where borrowings aredenominated in localcurrencies.

(ii) Unlike currencies of many advanced

countries, rupee is not fully convertible.

(iii) Hedging is not possible for the

full period for which the loan is taken.

Hedging is available for shorter periods

but not for longer periods, and the

duration of the borrowings is very long.

(iv) Indian companies are not permitted

to prepay the foreign currency loans.

(v) Other countries such as South Korea

have also been raising these issues.

(vi) It is not appropriate to recognise the

exchange differences immediately which

arise as a result of items which are to be

paid/realised in foreign currency, after a

long term nature.

2. Ind AS 28, Investment in Associates

As per IFRS

IAS 28 requires that difference between

the reporting period of an associate and that of the investor should not be more

than three months, in any case.

1 The term ‘IFRS’ includes not only the International Financial Reporting Standards (IFRSs) issued by the IASB, it also includes the International Accounting Standards

(IASs), IFRICs and SICs.

F E A T U R E S




Care out

The phrase ‘unless it is impracticable’

has been added in the relevant

requirement i.e., paragraph 25 of Ind

AS 28.

Reasons

Since the investor does not have control

over the associate, it may not be able

to inuence the associate to changeits accounting period if it does not fall

within 3 months.

Apart from this, another reason can

be a situation, e.g., where an entity

is an associate of two investors and

difference between the reporting dates

of the associate and the investors

is more than three months and the

reporting dates of the two investors are

also different. In that case a problem

will arise that in respect of which

investor the associate will have tochange its reporting period.

3. Ind AS 28, Investment in Associates

As per IFRS

IAS 28 requires that for the purpose of

applying equity method of accounting in

the preparation of investor’s nancial

statements, uniform accounting policies

should be used. In other words, if the

associate’s accounting policies are

different from those of the investor, the

investor should change the nancial

statements of the associate by using

same accounting policies.

Care out

The phrase, ‘unless impracticable to

do so’ has been added in the relevant

requirements i.e., paragraph 26 of Ind

AS 28.

Reasons

Since the investor has signicant

inuence and not control over theassociate, it may not be able to inuence

the associate to change its accounting

policies.

4. Ind AS 32, Financial Instruments:

Presentation

Care out

An exception has been included to

the denition of ‘nancial liability’

in paragraph 11 (b) (ii), Ind AS 32 to

consider the equity conversion option

embedded in a convertible bonddenominated in foreign currency to

acquire a xed number of entity’s

own equity instruments as an equity

instrument if the exercise price is xed

in any currency. This exception is not

provided in IAS 32.

Reasons

This position is not appropriate in

instruments such as FCCBs since the

number of shares convertible on the

exercise of the option remains xed and

the amount at which the option is to be

exercised in terms of foreign currency is

also xed; merely the difference in thecurrency should not affect the nature of

derivative, i.e., the option.

5. Ind AS 39, Financial Instruments:

Recognition and Measurement

As per IFRS

IAS 39 requires all changes in fair values

in case of nancial liabilities designated

at fair value through Prot and Loss at

initial recognition shall be recognised in

prot or loss. IFRS 9 which will replaceIAS 39 requires these to be recognised

in ‘other comprehensive income’.

Care out

A proviso has been added to paragraph

48 of Ind AS 39 that in determining the

fair value of the nancial liabilities which

upon initial recognition are designated

at fair value through prot or loss, any

change in fair value consequent to

changes in the entity’s own credit risk

shall be ignored.

Reasons

It is felt that recognition of gain in prot

or loss or in ‘other comprehensive

income’ on deterioration of own

credit risk is not proper because such

deterioration ordinarily occurs when

an entity is incurring losses. Thus, if an

entity is allowed to recognise gain on

deterioration of its own credit risk, it will

book gains when its performance is not

upto the mark. In the recent nancial

crisis in USA, it was noted that somebanks booked gains while they were

incurring losses due to the crisis.

6. Ind AS 103, Business Combinations

As per IFRS

IFRS 3 requires bargain purchase gain

arising on business combination to be

recognised in prot or loss.

Care out

Ind AS 103 requires the same to be

recognised in other comprehensiveincome and accumulated in equity

as capital reserve, unless there is

no clear evidence for the underlying

reason for classication of the business

combination as a bargain purchase,in

which case, it shall be recognised

directly in equity as capital reserve.

Reasons

It is felt that recognition of such gains

in prot or loss would result into

recognition of unrealised gains as the

value of net assets is determined on

the basis of fair value of net assets

acquired.

7. Ind AS 101, First-time Adoption of

Indian Accounting Standards

(i) Presentation of comparaties in

the First-time Adoption of Indian

Accounting Standards (Ind AS) 101

(corresponding to IFRS 1)

As per IFRS

IFRS 1 denes transitional date as

beginning of the earliest period for which

an entity presents full comparativeinformation under IFRS. It is this date

which is the starting point for IFRS and

it is on this date the cumulative impact

of transition is recorded based on

assessment of conditions at that date by

applying the standards retrospectively

except to the extent specically provided

in this standard as optional exemptions

and mandatory exceptions. Accordingly,

the comparatives, i.e., the previous year

gures are also presented in the rst

nancial statements prepared under

IFRS on the basis of IFRS.

Care out

Ind AS 101, requires an entity to provide

comparatives as per the existing

notied Accounting Standards. It is

provided that, in addition to aforesaid

comparatives, an entity may also

provide comparatives as per Ind AS on

a memorandum basis.

Reason

This would facilitate smooth

convergence with IFRS as comparatives

are not required to be in accordance

with the Ind ASs. It is also felt that since

Ind AS 101 would not be considered

to be in existence for the comparative

period, requiring comparatives to be

prepared on the basis of Ind AS may not

be legally defensible.

(ii) Presentation of reconciliation

As per IFRS

IFRS 1 requires reconciliations for

opening equity, total comprehensive

income, cash ow statement and

closing equity for the comparative

period to explain the transition to IFRS

from previous GAAP.

F E A T U R E S




Jobprole

• Designation – Senior Manager Actuarial• Department - Actuary• Location – Prabhadevi, Mumbai

Qualication/Experience/Competencies(Noofyears&type)/Age

• Engineer/MBA/CA• Should have cleared most of the CT papers• Strong analytical and innovative problem solving skills;• Excellent written and oral communication skills;• At least 4 years in actuarial department of a life ofce

• Should have sound knowledge of Embedded Value Reporting / Valuation agency• Should be procient in Prophet and excel

Key Accountabilities of the Role Manage and delier

• Quarterly Embedded Value Reporting process including Analysis of Movements. It consists of a. Market Consistent Basisb. Traditional Basis

- for our Board and- for incorporation into Prudential Corporation Asia disclosures.

c. Traditional Basis channel (sub business unit) level Analysis of Movements

Monthly Ne Business Reporting Process

•User Acceptance Testing of the Embedded Value / Market Consistent Embedded Value models•Investigating various Experience Variances and providing inputs to the Assumption Setting Process

About ICICI Prudential life Insurance

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank - one of India’s foremost nancial ser-vices companies-and Prudential plc - a leading international nancial services group headquartered in the UnitedKingdom.Further information about us can be explored at – www.iciciprulife.com. Pls e-mail resumes to [email protected] with “Senior Manager Actuarial” as the subject.

Care out

Ind AS 101 provides an option to

provide a comparative period nancial

statements on memorandum basis.

Where the entities do not exercise this

option and, therefore, do not provide

comparatives, they need not provide

reconciliation for total comprehensive

income, cash ow statement and

closing equity in the rst year of transition but are expected to disclose

signicant differences pertaining to

total comprehensive income. Entities

that provide comparatives would have to

provide reconciliations which are similar

to IFRS.

Reason


convergence with IFRS.

(iii) Cost of Non-current Assets Held

for Sale and Discontinued Operations

on the date of transition on First-

time Adoption of Indian Accounting

Standards (Ind AS)

Care out

Ind AS 101 provides transitional relief

that while applying Ind AS 105 - Non-

current Assets Held for Sale and

Discontinued Operations, an entity may

use the transitional date circumstances

to measure such assets or operations

at the lower of carrying value and fair

value less cost to sell.

Reason



(i) Foreign currency gains/losses

on translation of long term monetary

items

Care out

Ind AS 101 provides that on the date

of transition, if there are long-term

monetary assets or long- term monetary

liabilities mentioned in paragraph

29A of Ind AS 21, an entity may

exercise the option mentioned in that

paragraph regarding spreading over

the unrealised Gains/Losses over

the life of Assets/Liabilities either

retrospectively or prospectively. If this

option is exercised prospectively, the

accumulated exchange differences in

respect of those items are deemed to

be zero on the date of transition.

Reason

Exemption given as a consequence of

optional treatment prescribed in Ind AS

21, The Effects of Changes in Foreign

Exchange Rates, in context of exchange

differences arising on account of certain

long-term monetary assets or long-term

monetary liabilities.

(v) Financial instruments existing on

transition date

Care out

Ind AS 101 provides that the nancial

instruments carried at amortised cost

should be measured in accordance with

Ind AS 39 from the date of recognition

of nancial instruments unless it is

impracticable (as dened in Ind AS 8)

for an entity to apply retrospectively the effective interest method or the

impairment requirements of Ind AS 39.

If it is impracticable to do so then the fair

value of the nancial asset at the date

of transition to Ind-ASs shall be the new

amortised cost of that nancial asset at

the date of transition to Ind ASs.

Ind AS 101 provides another exemption

that nancial instruments measured at

fair value shall be measured at fair value

as on the date of transition to Ind AS.

Reason

This exemption would facilitate smooth


(vi)DenitionofpreviousGAAPunder

Ind AS 101 First-time Adoption of

Indian Accounting Standards

As per IFRS

IFRS 1 denes previous GAAP as the

basis of accounting that a rst-time

adopter used immediately before

adopting IFRS.

F E A T U R E S

Continued on next page..

C A R E E R O

P P O R T

U N I T Y




Care out

Ind AS 101 denes previous GAAP as

the basis of accounting that a rst-

time adopter used immediately before

adopting Ind ASs for its reporting

requirements in India. For instance,

for companies preparing their nancial

statements in accordance with the

existing Accounting Standards notied

under the Companies (Accounting Standards) Rules, 2006 shall consider

those nancial statements as previous

GAAP nancial statements.

Reason

The change makes it mandatory

for Indian companies to consider

the nancial statements prepared

in accordance with existing notied

Indian accounting standards as was

applicable to them as under Companies

(Accounting Standards)

Rule, 2006 as previous GAAP when

it transitions to Ind AS as the law

prevailing in India does not recognise

the nancial statements prepared in

accordance with Accounting Standards

other than those prescribed under the

Companies Act.

(ii) Cost of Property, Plant and

Euipment (PPE), Intangible Assets,

Inestment Property, on the date of

transition of First-time Adoption of

Indian Accounting Standards.

Ind AS 101 provides an entity an option

to use carrying values of all assets as

on the date of transition in accordance

with previous GAAP as an acceptable

starting point under Ind AS

Reasons

The existing Indian notied Accounting

Standards are not signicantly different

from IFRS as all the standards have

been based on IFRS. It will minimise the

cost of convergence.

B.Carve-outs for specic industries

1. Ind AS 18, Revenue

As per IFRS

On the basis of principles of the

IAS 18, IFRIC 15 on Agreement for

Construction of Real Estate, prescribes

that construction of real estate should

be treated as sale of goods and

revenue should be recognised when

the entity has transferred signicant

risks and rewards of ownership and has

retained neither continuing managerial

involvement nor effective control.

Care out

IFRIC 15 has not been included in Ind

AS 18, Revenue. Such agreements

have been scoped out from Ind AS 18

and have been included in Ind AS 11,

Construction Contracts.

Reasons

(i) IFRIC 15, would have required the

real estate developers to recognise therevenue in their nancial statements

based on the completion method i.e.,

only in the last year of the completion

of the project. In that case, the prot

and loss account of the developers will

not truly reect the performance of the

business, as during the years the real

estate project continues, no revenue

will be recognised. In other words, prot

and loss account will not reect proper

measure of performance of business.

(ii) Some countries such as Malaysiahave also decided not to apply IFRIC

15 for the time being. Similarly, while

Singapore has decided to issue IFRIC

15, it has provided specic guidance in

the context of legal situations prevailing

in that country.

2. Ind AS 18, Revenue

Care out

A footnote has been added in paragraph

1 to Ind AS 18, Revenue, that for rate

regulated entities, this standard shall

stand modied, where and to the extent

the recognition and measurement of

revenue of such entities is affected

by recognition and measurement of

regulatory assets/liabilities as per the

Guidance Note on the subject being

issued by the Institute of Chartered

Accountants of India.

Reason

Rate regulated entities such as

electricity companies are subject to tariff xation by the relevant

authorities. Tariff is xed on the basis

of certain costs which are different

from the expenses recognised in

nancial statements. Such differences

may result into certain regulatory

assets and regulatory liabilities which

are presently not recognised as per

the IFRS. Such entities feel that

such assets and liabilities exist and,

therefore, should be recognised in

nancial statements. IASB had earlier

taken up a project on this subject which

has been dropped from its Agenda. ICAI

is developing a Guidance Note on the

subject.

3. Indian Accounting Standard on

Agriculture (Corresponding to IAS 41)

As per IFRS

IAS 41, Agriculture, requires

measurement of biological assets, viz.,

living animals and plants at fair value

and recognising gains and losses arising

on such measurement in prot or loss,

unless ascertainment of fair value is

unreliable.

Care out

It has been decided to revise the

Standard and not to issue the standard

as it is.

Reasons

(i) There is difculty in identifying the

attributes of biological assets, the cost

of fair valuation, and high volatility of

signicant qualitative factors (not within

the control of the entity) leads to greatersubjectivity in estimating fair value.

(ii) The quoted market price for bearer

biological assets (e.g. long-term assets

that produce each year such as tea,

coffee, rubber and palm oil trees) is

not easily available, since these are not

traded in the open market.

(iii) Present value (PV) method is to

be adopted for estimating fair value

of biological assets such as forests.

Making appropriate estimates of futureprice and costs levels are key factors

for a reliable fair value measurement

of standing forests. Due to the long-

term nature of the period of cash ows,

small uctuations in the assumptions

may have a signicant effect on the

calculated fair value.

(iv) Fair value of biological assets may not

be relevant because most plantations

are rarely sold. Fair valuation may give

the impression that the value of the

company increases when in reality

nothing has changed.

(v) Considering the high volatility of

prices for the end products, the fair

value adopted as cost as per IAS 41,

may result in very signicant impact on

the protability of the companies.

III Other major changes in Indian

Accounting Standards is-a-is IFRSs

not resulting in care-outs

1. Ind AS 1, Presentation of Financial Statements

1. With regard to preparation of

Statement of prot and loss, IAS 1,

F E A T U R E S




Presentation of Financial Statements,

provides an option either to follow the

single statement approach or to follow

the two statement approach. While

in the single statement approach,

all items of income and expense

are recognised in the statement of

profit and loss, in the two statements

approach, two statements are

prepared, one displaying components

of profit or loss (separate incomestatement) and the other beginning

with profit or loss and displaying

components of other comprehensive

income. Ind AS 1 allows only the single

statement approach.

2. IAS 1 requires preparation of a

Statement of Changes in Equity as a

separate statement. Ind AS

1 requires the Statement of Changes

in Equity to be shown as a part of the

balance sheet.

3. IAS 1 gives the option to individual

entities to follow different terminology

for the titles of nancial statements. Ind

AS 1 is changed to remove alternatives

by giving one terminology to be used by

all entities.

4. IAS 1 permits the periodicity, for

example, of 52 weeks for preparation of

nancial statements. Ind AS 1 does not

permit it.

5. IAS 1 requires an entity o present

an analysis of expenses recognised in

prot or loss using a classication based

on either their nature or their function

within the equity. Ind AS 1 requires only

nature-wise classication of expenses.

6. IAS 1 contains Implementation

Guidance. Ind AS 1 does not include

the same because various enactments

have prescribed formats,e.g., Schedule

VI to the Companies Act, 1956.

2. Ind AS 7, Statement of Cash Flows

1. In case of other than nancial entities,

IAS 7 gives an option to classify the

interest paid and interest and dividends

received as item of operating cash

ows. Ind AS 7 does not provide such an

option and requires these items to be

classied as items of nancing activity

and investing activity, respectively.

2. IAS 7 gives an option to classify the

dividend paid as an item of operating

activity. However, Ind AS 7 requires it to be classied as a part of nancing

activity only.

3. Ind AS 8, Accounting Policies,

Changes in Accounting Estimates and

Errors

Ind AS 8 has been amended to provide

that in absence of specic Ind AS

on the subject, management may

also rst consider the most recent

pronouncements of International

Accounting Standards Board and in

absence thereof those of the other

standard-setting bodies that usea similar conceptual framework to

develop accounting standards, other

accounting literature and accepted

industry practices.

4. Ind AS 16, Property, Plant and

Equipment

Language of paragraph 8 has been

changed to clarify more precisely that

‘servicing equipment’ also qualies as

property, plant and equipment when an

entity expects to use them during more than one period.

5. Ind AS 19, Employee Benets

1. According to Ind AS 19 the rate to

be used to discount post-employment

benet obligation shall be determined

by reference to the market yields on

government bonds, whereas under IAS

19, the government bonds can be used

only where there is no deep market of

high quality corporate bonds.

2. To illustrate treatment of gratuitysubject to ceiling under Indian Gratuity

Rules, an example has been added in

Ind AS 19.

3. IAS 19 permits various options for

treatment of actuarial gains and losses

for post- employment dened benet

plans whereas Ind AS 19 requires

recognition of the same in other

comprehensive income, both for post-

employment dened benet plans and

other long-term employment benet

plans. The actuarial gains recognisedin other comprehensive income should

be recognised immediately in retained

earnings and should not be reclassied

to prot or loss in a subsequent period.

6. Ind AS 20, Accounting for

Government Grants and Disclosure of

Government Assistance

1. IAS 20 gives an option to measure

non-monetary government grants either

at their fair value or at nominal value.

Ind AS 20 requires measurement of such grants only at their fair value. Thus,

the option to measure these grants at

nominal value is not available under Ind

AS 20.

2. IAS 20 gives an option to present

the grants related to assets, including

non-monetary grants at fair value in

the balance sheet either by setting

up the grant as deferred income or

by deducting the grant in arriving at

the carrying amount of the asset. Ind

AS 20 requires presentation of such

grants in balance sheet only by setting

up the grant as deferred income. Thus,

the option to present such grants bydeduction of the grant in arriving at

the carrying amount of the asset is not

available under Ind AS 20.

7. Ind AS 21, The Effects of Changes in

Foreign Exchange Rates

1. When there is a change in functional

currency of either the reporting currency

or a signicant foreign operation, IAS

21 requires disclosure of that fact

and the reason for the change in

functional currency. Ind AS 21 requires

an additional disclosure of the date of

change in functional currency.

2. The following examples have been

included in Ind AS 21, The Effects of

Changes in Foreign Exchange Rates, as

Appendix B:

1) An example to clarify the provisions of

paragraph 14.

2) An example to clarify impairment loss

in Paragraph 25.

3) An example to clarify paragraphs 33and 37.

4) The date of change of functional

currency should also be disclosed in

paragraph 57.

8. Ind AS 23, Borrowing Costs

IAS 23 provides no guidance as to how

the adjust-ment prescribed in paragraph

6(e) is to be deter-mined. Ind AS 23

provides guidance in this regard.

9. Ind AS 24, Related Party Disclosures

1. In Ind AS 24, disclosures which conict

with condentiality requirements of

statute/regulations are not required to

be made since Accounting Standards

cannot override legal/regulatory

requirements.

2. Paragraph 24A (reproduced below)

has been included in the Ind AS 24.

It provides additional claricatory

guidance regarding aggregation of

transactions for disclosure.“24A Disclosure of details of particular

transactions with individual related

parties would frequently be too

voluminous to be easily understood.

F E A T U R E S




Accordingly, items of a similar nature

may be disclosed in aggregate by type

of related party. However, this is not

done in such a way as to obscure the

importance of signicant transactions.

Hence, purchases or sales of goods are

not aggregated with purchases or sales

of xed assets. Nor a material related

party transaction with an individual

party is clubbed in an aggregated

disclosure.”

3. In the denition of the ‘close members

of the family of a person’ , relatives as

specied under the meaning of ‘relative’

under the Companies Act, 1956, has

been included.

10. Ind AS 27, Consolidated and

Separate Financial Statements

1. Paragraphs 8, 10 and 42 have

been deleted and paragraphs 9, 11,

39 and 43 have been modied as the

applicability or exemptions to the IndianAccounting Standards is governed by

the Companies Act and the Rules made

thereunder.

2. A sentence has been added in

paragraph 9 of Ind AS 27, Consolidated

and Separate Financial Statements

requiring that for companies the form

of consolidated nancial statements as

given in Appendix C to this standard shall

be applied to the extent circumstances

admit.

11. Ind AS 29, Financial Reporting in

Hyperination- ary Economies

Ind AS 29 requires an additional

disclosure regarding the duration of the

hyperinationary situation existing in

the economy.

12. Ind AS 33, Earnings per Share

1. IAS 33 provides that when an entity

presents both consolidated nancial

statements and separate nancial

statements, it may give EPS related

information in consolidated nancial

statements only, whereas, the Ind AS 33

requires EPS related information to be

disclosed both in consolidated nancial

statements and separate nancial

statements.

2. Paragraph 2 of IAS 33 requires that

the entire standard applies to :

(a) the separate or individual nancial

statements of an entity:

(i) whose ordinary shares or potential

ordinary shares are traded in a public

market (a domestic or foreign stock

exchange or an over-the-counter market,

including local and regional markets) or

(ii) that les, or is in the process of

ling, its nancial statements with a

Securities Regulator or other regulatory

organisation for the purpose of issuing

ordinary shares in a public market; and

(b) the consolidated nancial statements

of a group with a parent:

(i) whose ordinary shares or potential

ordinary shares are traded in a publicmarket (a domestic or foreign stock

exchange or an over-the-counter

market, including local and regional

markets) or

(ii) that les, or is in the process of

ling, its nancial statements with a

Securities Regulator or other regulatory

organisation for the purpose of issuing

ordinary shares in a public market.

It also requires that an entity that

discloses earnings per share shallcalculate and disclose earnings

per share in accordance with this

Standard.

The above have been deleted in the Ind

AS as the applicability or exemptions

to the Indian Accounting Standards is

governed by the Companies Act and the

Rules made there under.

3. Paragraph 4 has been modied in

Ind AS 33 to clarify that an entity shall

not present in separate nancial sta tements,earningspersharebasedont

heinformation given in consolidated

nancial statements, besides requiring

as in IAS 33, that earnings per share

based on the information given in

separate nancial statements shall

not be presented in the consolidated

nancial statements.

4. In Ind AS 33, a paragraph has been

added after paragraph 12 on the

following lines -

“Where any item of income or expense

which is otherwise required to be

recognised in prot or loss in accordance

with accounting standards is debited or

credited to securities premium account/

other reserves, the amount in respect

thereof shall be deducted from prot or

loss from continuing operations for the

purpose of calculating basic earnings

per share.”

5. In Ind AS 33 paragraph 15 has

been amended by adding the phrase,‘irrespectie of hether such discount

or premium is debited or credited to

securities premium account’ to further

clarify that such discount or premium

shall also be amortised to retained

earnings.

13. Ind AS 34, Interim Financial

Reporting

A footnote has been added to paragraph

1of Ind AS 34, Interim Financial

Reporting that Unaudited Financial

Results required to be prepared and

presented under Clause 41 of Listing Agreement with stock exchanges is not

an ‘Interim Financial Report’ as dened

in paragraph 4 of this Standard.

14. Ind AS 40, Investment Property

IAS 40 permits both cost model and fair

value model (except in some situations)

for measurement of investment

properties after initial recognition. Ind

AS 40 permits only the cost model.

15. Ind AS 101 First-time Adoption of Indian Accounting Standards

1. Paragraph 3 of Ind AS 101 species

that an entity’s rst Ind AS nancial

statements are the rst annual

nancial statements in which the entity

adopts Ind ASs in accordance with

Ind ASs notied under the Companies

Act, 1956 whereas IFRS 1 provides

various examples of rst IFRS nancial

statements.

2. Paragraph 4 of IFRS 1 providesvarious examples of instances when an

entity does not apply this IFRS. Ind AS

101 does not provide the same.

3. IFRS 1 requires specic disclosures

if the entity provides non-IFRS

comparative information and historical

summaries. Such disclosures are not

required under Ind AS 101.

16. Ind AS 103, Business Combinations

IFRS 3 excludes from its scope businesscombinations of entities under common

control. Appendix C of Ind AS 103 gives

guidance in this regard.

Notes:

1. Differences between Indian

Accounting Standards (Ind-ASs)

and corresponding IFRSs are given

in Appendix 1 at the end of each

Indian Accounting Standard.

2. Apart from the changes in IFRSs

as a result of carve- outs and otherchanges as described in above

section, changes consequential

thereto have also been made in all

Ind ASs, wherever required.

F E A T U R E S




Iv. Comparison of IFRS as applicable on 1st April 2011 ith Ind AS, placed at MCA’s ebsite

S

No.

IFRS /

IAS No.

Corresponding

Indian Accounting

Standard

Name

1. IAS 1 Ind AS 1 Presentation of Financial Statements

2. IAS 2 Ind AS 2 Inventories

3. IAS 7 Ind AS 7 Statement of Cash Flows

4. IAS 8 Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors5. IAS 10 Ind AS 10 Events after the Reporting Period

6. IAS 11 Ind AS 11 Construction Contracts

7. IAS 12 Ind AS 12 Income Taxes

8. IAS 16 Ind AS 16 Property, Plant and Equipment

9. IAS 17 Ind AS 17 Leases

10. IAS 18 Ind AS 18 Revenue

11. IAS 19 Ind AS 19 Employee Benefts

12. IAS 20 Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

13. IAS 21 Ind AS 21 The Effects of Changes in Foreign Exchange Rates

14. IAS 23 Ind AS 23 Borrowing Costs

15. IAS 24 Ind AS 24 Related Party Disclosures

16. IAS 26 * Accounting and Reporting by Retirement Beneft Plans

17. IAS 27 Ind AS 27 Consolidated and Separate Financial Statements

18. IAS 28 Ind AS 28 Investments in Associates

19. IAS 29 Ind AS 29 Financial Reporting in Hyperinationary Economies

20. IAS 31 Ind AS 31 Interests in Joint Ventures

21. IAS 32 Ind AS 32 Financial Instruments: Presentation

22. IAS 33 Ind AS 33 Earnings per Share

23. IAS 34 Ind AS 34 Interim Financial Reporting

24. IAS 36 Ind AS 36 Impairment of Assets

25. IAS 37 Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

26. IAS 38 Ind AS 38 Intangible Assets

27. IAS 39 Ind AS 39 Financial Instruments: Recognition and Measurement

28. IAS 40 Ind AS 41 Investment Property

29. IAS 41 ** Agriculture

30. IFRS 1 Ind AS 101 First-time Adoption of Indian Accounting Standards

31. IFRS 2 Ind AS 102 Share based Payment

32. IFRS 3 Ind AS 103 Business Combinations

33. IFRS 4 Ind AS 104 Insurance Contracts

34. IFRS 5 Ind AS 105 Non current Assets Held for Sale and Discontinued Operations

35. IFRS 6 Ind AS 106 Exploration for and Evaluation of Mineral Resources

36. IFRS 7 Ind AS 107 Financial Instruments: Disclosures

37. IFRS 8 Ind AS 108 Operating Segments

38. IFRS 9 *** Financial Instruments

* Ind AS corresponding to IAS 26 Accounting and Reporting by Retirement Benet Plans has not been placed on MCA’s website

as this standard is not applicable to companies

** Ind AS corresponding to IAS 41, Agriculture, is being redrafted.

*** It has been decided that Ind AS corresponding to IFRS 9, Financial Instruments, should not be issued since it was felt that it was

incomplete; instead of this standard, Ind AS 39 has been issued.

F E A T U R E S




Comparison of IFRICs/SICs as applicable on 1st April 2011 ith corresponding Appendices to Ind ASs

SNo.

IFRIC/SIC No.

Corresponding Appendixincluded in Ind AS

IFRIC/SIC

1. IFRIC 1 Appendix A to Ind AS 16 Changes in Existing Decommissioning, Restoration and Similar Liabilities

2. IFRIC 2 # Members’ Shares in Co operative Entities and Similar Instruments

3. IFRIC 4 Appendix C to Ind AS 17 Determining whether an Arrangement contains a Lease

4. IFRIC 5 Appendix A to Ind AS 37Rights to Interests arising from Decommissioning, Restoration andEnvironmental Rehabilitation Funds

5. IFRIC 6 Appendix B to Ind AS 37Liabilities arising from Participating in a Specic Market— Waste Electrical andElectronic Equipment

6. IFRIC 7 Appendix A to Ind AS 29Applying the Restatement Approach under Ind AS 29 Financial Reporting inHyperinationary Economies

7. IFRIC 9 Appendix C to Ind AS 39 Reassessment of Embedded Derivatives

8. IFRIC 10 Appendix A to Ind AS 34 Interim Financial Reporting and Impairment

9. IFRIC 12 Appendix A to Ind AS 11 Service Concession Arrangements

10. IFRIC 13 Appendix B to Ind AS 18 Customer Loyalty Programmes

11. IFRIC 14 Appendix A to Ind AS 19Ind AS 19— The Limit on a Dened Benet Asset, Minimum Funding Requirements and their Interaction

12. IFRIC 15 ## Agreements for the Construction of Real Estate

13. IFRIC 16 Appendix D to Ind AS 39 Hedges of a Net Investment in a Foreign Operation

14. IFRIC 17 Appendix A to Ind AS 10 Distributions of Non-cash Assets to Owners

15. IFRIC 18 Appendix C to Ind AS 18 Transfers of Assets from Customers

16. IFRIC 19 Appendix A to Ind AS 32 Extinguishing Financial Liabilities with Equity Instruments

17. SIC-7 ### Introduction of Euro

18. SIC-10 Appendix A to Ind AS 20 Government Assistance—No Specic Relation to Operating Activities

19. SIC-12 Appendix A to Ind AS 27 Consolidation—Special Purpose Entities

20. SIC-13 Appendix A to Ind AS 31 Jointly Controlled Entities— Non-Monetary Contributions by Venturers

21. SIC-15 Appendix A to Ind AS 17 Operating Leases—Incentives

22. SIC- 21 Appendix A to Ind AS 12 Income Taxes—Recovery of Revalued Non-Depreciable Assets

23. SIC-25 Appendix B to Ind AS 12 Income Taxes—Changes in the Tax Status of an Entity or its Shareholders

24. SIC-27 Appendix B to Ind AS 17 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

25. SIC-29 Appendix B to Ind AS 11 Service Concession Arrangements: Disclosures

26. SIC-31 Appendix A to Ind AS 18 Revenue—Barter Transactions Involving Advertising Services

27. SIC-32 Appendix A to Ind AS 38 Intangible Assets—Web Site Costs

# Appendix corresponding to IFRIC 2 is not issued as it is not relevant for the companies

## On the basis of principles of the IAS 18, IFRIC 15 on Agreement for Construction of Real Estate prescribes that construction of

real estate should be treated as sale of goods and revenue should be recognised when the entity has transferred signicant

risks and rewards of ownership and retained neither continuing managerial involvement nor effective control. IFRIC 15 has not

been included in Ind AS 18 to scope out such agreements and to include the same in Ind AS 11, Construction Contracts

### Appendix corresponding to SIC 7 is not issued as it is not relevant in the Indian context.

F E A T U R E S

when I despair, I remember that all through history the ways of truth and love have always won. There have been

tyrants, and murderers, and for a time they can seem invincible, but in the end they always fall. Think of it--always.

- Mahatma Gandhi




A PEEP INTO IND AS 19: THE NEw wAY FOR PENSION LIABILITY

MEASURES AND DISCLOSURES

By R Arunachalam FIA ; FIAI and

Nasrat Kamal FIA ; FIAI

I ntroduction

The requirement for a uniform

accounting framework across the

world, the emergence of International

Financial Reporting Standards (IFRS)

and its growing signicance has been

phenomenal during the past few years.

In pursuance of this requirement, India

has started the process of convergence

of Indian Accounting Standards with

IFRS.

The International Accounting Standards

Board (IASB) is an independent, privately

funded accounting standard setter

based in London. The IASB was founded

on 1 April 2001 as the successor to the International Accounting Standards

Committee (IASC).

International Financial Reporting

Standards (IFRS) are principles

based Standards, Interpretations and

Framework developed, adopted and

promoted for use and application

across various companies.

IASB is responsible for setting the

IFRS. Many of the standards forming

part of IFRS are known by the older

name of International Accounting Standards (IAS). IASs were issued

between 1973 and 2001 by the

erstwhile IASC. The IASB adopted all

these existing IASs in its rst meeting

and continued to develop new

standards calling them as IFRS.

IFRS are used in many parts of the world,

including the European Union, Hong

Kong, Australia, Malaysia, Pakistan, Gulf

Countries, Russia, South

Africa, Singapore and Turkey. As of

2008, more than 113 countries around the world, including all of Europe

require or permit IFRS reporting. The

Securities and Exchange Commission

(SEC) in the US is slowly but

progressively shifting from requiring

only US Generally Accepted Accounting

Principles (US GAAP) to accepting

IFRS and will most likely accept IFRS

standards in the long term.

It is expected that IFRS adoptionworldwide will be benecial to investors

and other users of nancial statements,

by reducing the costs of comparing

alternative investments and increasing

the quality of information. Companies

are also expected to benet, as investors

will be more willing to provide nancing.

IndianotiesIndAS19

The Institute of Chartered Accountants

of India (ICAI), set up by an Act of

Parliament in 1949, is a statutory body

aimed at regulating the profession of Chartered Accountants in India. The

ICAI is also responsible for specifying

and recommending the accounting

standards to be followed by companies

conducting business in India. While

formulating accounting standards,

the ICAI takes into consideration the

applicable laws, customs, usages and

business environment prevailing in the

country.

As per the Companies Act, 1956, ICAI

would recommend the accounting

standards which may then be prescribed

by the Central Government in consultation

with the National Advisory Committee

on Accounting Standards (NACAS) for

adoption by companies. The section

further claries that the accounting

standards specied by the ICAI shall be

deemed to be the accounting standards

until such prescription by the Central

Government.

The Central Government constituted

the National Advisory Committee on

Accounting Standards (NACAS) in 2001.The NACAS have been reviewing the

accounting standards and working

closely with the ICAI since its constitution.

The accounting standards specied

by the ICAI were deemed to be the

accounting standards until 2006,

by when the Ministry of Corporate

Affairs started notifying the prescribed

accounting standards in consultation

with NACAS.

The Ministry of Corporate Affairs (MCA)

notied thirty ve Indian Accounting

Standards, referred to as “Ind AS”, on

25 February 2011 as part of the IFRS

convergence process. The MCA will

implement the IFRS converged Indian

Accounting Standards in a phased

manner after various issues including

tax related issues are resolved with the

concerned departments. It would be

ensured that the implementation of the

converged standards is smooth for all the stakeholders.

The date of implementation of the Ind

AS will be notied by the MCA at a later

date. Although the MCA is yet to nalize

and declare the exact implementation

date/s, notication of Ind AS is a

signicant step towards convergence

with IFRS.

In the ensuing sections of this article, we

have atempted to capture the synopsis

of areas of divergence between Ind AS

19 as notied by the MCA, the existing standard AS 15 (rev 2005) as adopted

by ICAI and the existing International

Accounting Standard IAS 19 as adopted

by IASB. We have also included the Ind

AS 19 impact for the companies and the

role of the Actuarial Profession.

Ind AS19changes from the existing

standard AS 15 (reised 2005)

ICAI issued the existing Accounting

Standard AS 15 (revised 2005) in March

2005 effective from accounting periods

commencing on or after 1 April 2006.This existing standard was regarded as an

improvement over the earlier standard.

It is a ‘market based’ standard that

measures employee benet liabilities on

a basis that is consistent with nancial

markets. The Table 1 summarizes the

key changes from this existing standard.

Table1DifferencesbetweenIndAS19andexistingstandardAS15(revised2005)

Constructive Obligations Ind AS 19 covers employee benets arising from constructive obligations. The existing standard does

not deal explicitly with the same. (Paragraph 3(c) of Ind AS 19)

Employees include all Direc- tors

As per the existing standard the term employee includes only whole time directors whereas under IndAS 19, the term includes directors. (Paragraph 6 of Ind AS 19)

Changes in Denitions The denitions of short-term employee benets, other long-term employee benets, and return on plan

assets and past service cost as per the existing standard have been changed in Ind AS 19. (Paragraph

7 of Ind AS 19)

F E A T U R E S




Multi-Employer Plan and

Contractual Agreement

Ind AS 19 deals with situations where there is a contractual agreement between a multi-employer plan

and its participants that determine how the surplus in the plan will be distributed to the participants (or

the decit funded). The existing standard does not deal with it. (Paragraph 32A of Ind AS 19)

Multi-Employer Plan and

Contingent Liabilities

Cross-reference to recognition of, or disclosure of information, of contingent liabilities (under AS 29), in

the case of multi-employer plans, appearing in the existing standard has been amended in Ind AS 19

as disclosure only, since, contingent liabilities should not be recognized (under Ind AS 37). (Paragraph

32 B of Ind AS 19)

Entities under Common

Control

As per Ind AS 19, participation in a dened benet plan sharing risks between various entities under

common control is a related party transaction for each group entity and some disclosures are required

in the separate or individual nancial statements of an entity. The existing standard does not containsimilar provisions. (Paragraph 34 B of Ind AS 19)

Actuary’s Involvement Ind AS 19 encourages (but does not require) an entity to involve a qualied actuary in the measurement

of all material postemployment benet obligations. The existing standard though does not require in-

volvement of a qualied actuary, does not specically encourage the same. (Paragraph 57 of Ind AS 19)

Asset Ceiling As per Ind AS 19, one of the limits for ‘asset ceiling’ is the total of (i) any cumulative unrecognized past

service cost and (ii) the present value of economic benets available in the form of refunds from the

plan or reductions in future contributions to the plan. As per the existing standard, the said limit is only

(ii) as above. (Paragraph 58(b) of Ind AS 19)

Financial Assumptions Ind AS 19 makes it clear that nancial assumptions shall be based on market expectations at the end

of the reporting period (for the period over which the obligations are to be settled). The existing stand-

ard does not clarify the same. (Paragraph 77 of Ind AS 19)

Negative Past Service Cost Ind AS 19 claries that negative past service cost arises when an entity changes the benets attribut-

able to past service so that the present value of the dened benet obligation decreases. The existing

standard does not clarify the same. (Paragraph 97 of Ind AS 19)

Curtailments Ind AS 19 provides the following clarications in the context of curtailments. (i) A curtailment may

arise from a reduction in the extent to which future salary increases are linked to the benets payable

for past service. (ii) When a plan amendment reduces benets, only the effect of reduction for future

service is a curtailment. The effect of any reduction for past service is a negative past service cost. The

existing standard does not provide these clarications.

Further Ind AS 19 requires ‘demonstrable commitment in respect of reduction in the number of employ-

ees’ as against the requirement of ‘present obligation’ in the existing standard. Also, the terms ‘mate-

rial reduction in the number of employees’ and ’material element of future service’ appearing in the ex-

isting standard have been replaced by the terms ‘signicant reduction in the number of employees’ and

’signicant element of future service’ respectively in Ind AS 19. (Paragraph 111 and 111 A of Ind AS 19)

Termination Benets Ind AS 19 provides more guidance on timing of recognition of termination benets. The measurement

criteria have also been expanded to deal with voluntary redundancy. The recognition criteria under the

revised standard differ from the criteria prescribed in the existing standard. (Paragraphs 133, 134 and

140 of Ind AS 19)

Recognition of Actuarial

Gains and Losses

Ind AS 19 requires recognition of the actuarial gains and losses in other comprehensive income, which

in turn to be immediately recognized in retained earnings. They should not be reclassied as prot or

losses in a subsequent period. The existing standard requires the recognition of the actuarial gains and

losses immediately in the statement of prot and loss as income or expense. (Paragraphs 92 and 93

of Ind AS 19)

Dened Benet Asset /

Minimum Funding Require-

ment

Appendix A of Ind AS19 provides guidance on the Limit on a Dened Benet Asset, Minimum Funding

Requirements and their Interaction. This provision compares with the IFRIC 14 of the IASB. This guid-

ance is not available in the existing standard. (Appendix A of Ind AS 19)

Inter Valuation Period The existing standard says that the detailed actuarial valuation may be made at intervals not exceeding

three years unlike Ind AS 19.

Ind AS 19 Impact for the Companies

The above changes and clarications in

the Ind AS 19 will help the companies

improve their disclosure and better align

with their IAS 19 reporting if any. The

signicant impact for the companies

would be:

• Inclusion of Directors: Thecompanies would now need to

include part time directors. Though

they could be few in numbers, their

pension cost could be signicant.

This would increase the expense

and the net liability provisions.

• Actuarial Gains and Losses: The

actuarial gains and losses will now

be immediately recognized in the

other comprehensive income and

not ow into the prot and loss. This

will remove the volatility in the prot

and loss which in turn improves

the credibility and understanding

of the nancial statements by

the investors. This will also help

achieve closer compatibility with the

amended IAS 19 as the amended

standard has similar provisions. The

other comprehensive income would

be adjusted against the retained

earnings and the net liability

provisions in the balance sheet

would not change.

• Termination Benets: The timing of

recognition of termination benets

including voluntary redundancy

could potentially impact the

expenses if there is a termination or

redundancy plan.

F E A T U R E S




F E A T U R E S

• Asset Ceiling: The cumulative

unrecognized past service cost

could now be included in the assets

which could potentially lower the net

liability for companies who have such

a provision.

The impact would be uniform across all

the sectors of the business. However the

impact would be higher for companies

who have consistently and signicantlyunder / overestimated their assumptions

such as salary increases or withdrawals.

The actuarial gains or losses from such

an under / overestimation will not ow

through the prot or loss as per Ind AS

19 and hence would have a signicant

impact in their reported prot or loss

gures.

IndAS19comparisonwiththeexisting

standard IAS 19

IASB issued the accounting standardIAS 19 for Employee Benets originally

in 1983. This has been amended

subsequently many times, the last

signicant amendments being in

December 2004 and June 2011. IAS

19 applies to all employee benets

offered by an employer to employees

and their dependents and beneciaries.

The Table 2 captures the signicant

differences between Ind AS 19 as

notied by the MCA and the existing

standard IAS 19 in practice (before June2011 amendment).

Table 2 Differences beteen Ind AS 19 and IAS 19 (before June 2011 amendment)

Topic Ind AS 19 IAS 19

Actuarial Gains and

Losses

Ind AS 19 provides a single option for recognition of

actuarial gains and losses for both post-employment

dened benet plans and other long-term employment

benet plans.

• Other Comprehensive Income Recognition

IAS 19 permits various options for treatment of

actuarial gains and losses for post-employment dened

benet plans.

• Prot or Loss Recognition – Corridor Approach *

• Prot or Loss Recognition – Faster than Corridor

Approach *

• Other Comprehensive Income Recognition

*removed in the amended IAS 19 effective fromJanuary 2013

Discount Rate The discount rate to be determined by reference to the

market yields at the end of the reporting period on gov-

ernment bonds.

The discount rate to be determined by reference to

market yields at the end of the reporting period on high

quality corporate bonds.

In countries (such as India) where there is no deep

market in such bonds, the discount rate could be

determined by reference to government bonds.

Transitional Provi-

sions

Transitional Provisions does not form part of Ind AS 19.

This has been included in Ind AS 101 wherever appro-

priate.

Transitional Provisions forms part of IAS 19. **

**removed in the amended IAS 19 effective from

January 2013 as the same has been included in IFRS 1

wherever appropriate.

Gratuity Example An example has been added in paragraph 70 to illustrate treatment of gratuity subject to ceiling under In-

dian Gratuity Rules

No such example provided.

Equivalent

Terminology

Balance Sheet

Statement of Prot or Loss

Approval of nancial statements for issue

Statement of Financial Position

Statement of Other Comprehensive Income

Authorization of nancial statements for issue

IASB amends IAS 19 effectie January 2013

As mentioned earlier, IASB has amended the standard in June 2011 which will be effective from January 2013. The earlier

adoption is as usual encouraged. The signicant changes are as provided in Table 3.

Table 3 Amendments made in IAS 19 (effectie January 2013)

Recognition of actuarial

gains and losses

(remeasurements)

Actuarial gains and losses are renamed as remeasurements and will be recognized immediately in other

comprehensive income. This means, they will be no longer deferred using the corridor approach or

recognized in prot and loss. Remeasurements recognized in other comprehensive income shall not be

recycled through prot or loss in subsequent periods.

Recognition of past

serice cost /

curtailment

Past service costs will be recognized in the period of a plan amendment; unvested benets will no

longer be spread over a future service period. A curtailment now occurs only when an entity reduces

signicantly the number of employees. Curtailment gains / losses are accounted as past service costs.

Measurement of Pension

Expense

Annual expense for a funded benet plan will include net interest expense or income calculated by

applying the discount rate to the net dened benet asset or liability. This will replace the nance charge

and expected return on plan assets.

Presentation in the

Income Statement

There will be less exibility in the income statement presentation. Benet cost will be split between (i)

cost of the benets accrued in the current period (service cost) and benet changes (past service cost,settlements and curtailments) and (ii) nance expense or income.

Other Changes The proposed amendment also includes changes to Risk Sharing, Multi-Employer Plan disclosure, Taxes

and Administration costs and Termination benets.

F E A T U R E S




The Role of the Actuarial Profession

The Actuarial Profession is heavily

involved and engaged in the

standards at both the global and various

national levels. The actuarial bodies in

various countries are currently:

accounting bodies in their countries

standards for easy and effective

investor understanding

The International Actuarial Association

Taskforce of Regulated Professions

The Private Sector Taskforce of

Regulated Professions and Industries

IASB and industries that are subject

facilitate economic stability in the

on the critical issue of global regulatory

convergence. The PSTF has released

convergence.

The Institute of Actuaries of India

(IAI) has nominated volunteers for

the Institute of Chartered Accountants

standard APS26: Actuarial Reportsunder Accounting Standard 15

(Revised, 2005) issued by the Institute

of Chartered Accountants of India to

Conclusion

regulatory bodies need to take certainfurther actions including regulatory

from the IFRS. It can be said that

The global convergence of accounting

avoid regulatory arbitrage, and reduce

nor desirable. During these situations,

convergence of outcomes could be

standards.

About the authors:

R Arunachalam is a Consulting Actuary

in the Insurance and Pensions area

based out of Chennai.

Nasrat Kamal is a Consulting Actuary in

the Insurance and Pensions area basedout of Bengaluru.

F E A T U R E S




SOLvENCY II UPDATE - RESULTS OF qIS5

By Gautam Kakar

S olency II is a long-term project

that started more than ten years

ago in EU ith an objectie to build

a reference regulatory frameork

that ill apply both in normal and

crisis circumstances. The design of

the frameork relies on technical

proisions hich allo undertakings

to meet their commitments toards

policyholders arising from the (re)

insurance activity (i.e. the expected

obligations), and capital reuirements

which shouldcoverunexpected losses

oer a one-year time horizon.

As part of the Solency II project, a

number of large scale eld-testing

exercises, so-called Quantitative

Impact Studies (qIS), ere carried

out.So farvesuchstudieshavebeen

carried out, the latest one being qIS 5hich as carried out in second half

of 2010. QIS exercises are crucial to

the deelopment of EU regulation and

are essential to ensure that Solency

II is designed after consultation ith

insurance industry, with sufcient

eidence of the impact of the regime

proposed. It must be emphasized that

QIS5isaeldtestandnotaproposal

forthenalSolvencyIIframework.

The fth Quantitative Impact Study

(qIS5) takes into account a number

of lessons learned from the recentnancial crisis. European Insurance

and Occupational Pensions Authority

(“EIOPA”) published the much aaited

results of qIS5 on 14th March, 2011.

Objecties of qIS 5

The QIS5 exercise was carried out with

the following objectives:

– To provide all stakeholders with detailed

information on the quantitative impact on

insurers and reinsurers’ solvency balance

sheets of the introduction of delegated

acts under Solvency II compared to thesituation under Solvency I;

– To check that the technical specications

are aligned with the principles and

calibration targets (including calibration

of standard formula) set out in the level 1

Framework Directive Proposal;

– To encourage insurers, reinsurers and

supervisors to prepare for the introduction

of Solvency II and to identify areas where

their internal processes, procedures and

infrastructure may need to be enhanced;

and in particular, to encourage insurers

and reinsurers to improve their datacollection processes;

– To provide a starting point for an ongoing

dialogue between supervisors and

insurers and reinsurers in preparation for

the new supervisory system.

The ndings of QIS5 will feed into the

ongoing and future work for the delegated

acts that will put into practice the

Solvency II Level 1 Framework Directive.

Key Findings

Participation

In total, 2,520 (re)insurers as well

as 167 groups participated in this

study, compared to 1,412 and 106

respectively in QIS4. In total, more than

95% of technical provisions and 85%

of premiums of the insurers subject

to Solvency II were covered by the test.

On an average, for the rms in the UK,

12.2 person-months were spent by a life

insurer and 7.4 person-months by a non-

life insurer on QIS5 exercise. For Solvency

II as a whole the estimated average

resource requirement for UK rms is591.5 person-months for a life insurer

and 357.7 person-months for a non-life

insurer. The resource requirement for

life business is generally higher due to

its complexity and long term nature of

business. In terms of the key areas of

focus for preparation, almost all countries

cited ensuring adequate quantity and/

or quality of resource. The need for

actuarial resources was particularly

highlighted, with risk management

professionals also being mentioned.

Conducting a gap analysis was seen asan important step in their preparations

along with a detailed project plan.

Alignment of existing processes with the

Solvency II requirements and changes

to organisational structure were seen as

some of the steps required

is largely explained by the impact of

the nancial crisis on the valuation of

the assets owned by the sector. At the

end of 2009, the capital surplus of the

insurance and reinsurance industry

totalled around €500bn compared to

over €600bn at the end of 2007. The

results of QIS5 are also driven by the

fundamental difference of valuation of

the balance sheet and the meaning of the

solvency requirements under Solvency

II, which led to an increase in capital

requirements, a decrease in technical

provisions and a relative increase in the

amount of eligible own funds. Taking into

account these elements, the nancial

position of the European (re)insurance

sector assessed against the QIS5

solvency capital requirements calculated

in accordance with the standard formulaor internal models remains comfortable

with eligible own funds in excess of the

regulatory requirements by €395bn. This

amounts to a decrease of the surplus of

€56bn compared to the current regime.

Generally, across all solo respondents the

SCR results obtained by using an internal

model were very close to those derived by

applying the standard formula. The most

signicant difference between standard

formula and (partial) internal model

results was observed among groups.

Groups’ internal model results showeda capital requirement of about 0.8 times

the size of the capital requirement based

on the standard formula calculation.

At European level, 15% of the participants

did not fully cover the SCR, which would

trigger regulatory action. Fewer than 9%

of participants covered 75% or less of

the SCR. A quarter of those undertakings

belong to insurance groups or nancial

conglomerates for which a capital

reallocation or intra-group risk transfers

would be available as a means for raising

their capital level. 4.6% of participants

across Europe were unable to meet theMCR requirement., which would trigger

the most serious intervention from the

supervisor, the withdrawal of the license.

1.3% of all participants have a shortfall

greater than 50% of the MCR. Overall,

0.6% of all participating undertakings

had negative own funds according to the

QIS5 valuation principles.

Three main drivers explain the changes

in the surplus from the current regime to

the Solvency II framework:

- shift from the current balance sheet

to the harmonised Solvency II balance

sheet;

- shift from the current requirements

to the harmonised Solvency II capital

requirements; and

All Number

affected

by Sol II

qIS5

particulars

(% of

number

affected)

Life 888 799 76%

Non-Life 2,681 1,879 68%

Reinsurer 203 187 61%

Captive 393 353 50%

Composite 588 467 72%

Total 4,753 3,680 68%

Financial Impact ( in terms of surplus,

SCR and MCR)

Since 2007 - the basis for the previous

QIS4 exercise - the nancial surplus of

the insurance sector, calculated under

Solvency I rules (i.e. neutral of any

Solvency II implications) has decreasedmarkedly in 2008 (minus €200bn),

and was followed by partial recovery in

2009 - which constitutes the basis for

the current QIS5 exercise. This evolution

F E A T U R E S




- differences in the own funds elements

allowed to cover the requirements.

On the liability side, the removal of the

prudence in existing technical provisions

had a far greater impact (66%) than

the revaluation upward of some best

estimates (-15%). The increase in

capital requirements going from the

Required Solvency Margin (RSM) to the

SCR amounted to 59% of the Solvency I

surplus.The sum of all risks modelled under

the SCR requirements calculated using

the standard formula or full or partial

internal models in QIS5 totalled more

than €1300bn. Taking into account the

reduction arising from diversication

benets recognised at solo level

based on the correlations between the

risks (€466bn) and the adjustment

recognizing the undertakings’ ability

to reduce discretionary benets or to

pay less taxes after a stress (in total

€314bn), this leads to the nal SCR being

a little above 41% of the sum of all risks

modelled (€547bn). The main risk drivers

were the market sub-risks (equity, spread

and interest rates) followed by the non-

life underwriting sub-risks (premium and

reserve risk and catastrophe risk).

QIS5 required the identication and

calculation of an amount representing

expected prots included in future

premiums (EPIFP) and its disclosure as

a separate item under unrestricted Tier

1. For this purpose future premiums are

those taken into account as part of the

cash inows used to determine technicalprovisions under Solvency II. In order to

provide quantication as part of QIS5

a proxy methodology was developed in

liaison with industry bodies which utilises

the lapse risk methodology already

specied for the SCR but re-calculates

this for EPIFP purposes on the basis of

a 100% lapse. Application of the proxy

required undertakings to hold all other

assumptions unchanged even if this

involved creating articial calculations

of a paidup amount for policies for which

no paid-up amount arises or which wouldbe void or cancelled if premiums were

not paid in practice. EPIFP attracted

a signicant level of comment during

QIS5 mainly around lack of clarity and

time consuming calculations. In terms

of results, weighted average percentage

of EPIFP to Tier 1 among undertakings

(those who provided EPIFP estimates)

was 20% (close to 7% of non-life and

around 30% for life) with a median of

14%.

Technical Proisions

Under Solvency II, the valuation of technical provisions follows the transfer

value principle, under which the value

of technical provisions shall correspond

to the current amount the insurer

would have to pay if was to transfer its

insurance obligations immediately to

another insurer. To achieve a valuation

consistent with this principle, the

technical provisions are calculated as a

best estimate plus a risk margin. The risk

margin represents the cost of providing an

amount of eligible own funds equal to the

Solvency Capital Requirement necessary

to support the insurance and reinsurance

obligations over the lifetime thereof.

Overall gross technical provisions for all

lines of business decreased by 1.4% from

Solvency I to QIS5. The main differences

between technical provisions under the

QIS5 and Solvency I methodologies can

be explained by the following:

• the use of a new discounting model

including the use of an illiquidity

premium for some products;

• the absence of any surrender oor;

• the recognition of future premiums

and charges; and

• the use of realistic assumptions in the best estimate calculation (i.e. no

implicit prudence margin, although

this is partly offset by the inclusion of

an explicit risk margin in addition to

the best estimate). In the valuation of

QIS5 liabilities, management actions

and policyholders’ behaviour, such

as lapses, renewals and surrenders,

were taken into account.

For life insurance business net

technical provisions in QIS5 increased

in comparison with Solvency I. This

was mainly caused by the decreasein reinsurance recoverables, as gross

technical provisions in fact showed a

slight decrease of 1.0%. For most non-

life lines of business net provisions

have decreased from Solvency I to QIS5;

as a whole, gross provisions for non-

life decreased by 24.9%. Equalisation

reserves can no longer be included in

the technical provisions. The reduction

between Solvency I and QIS5 for non-life

business is mainly due to the discounting

of future cash ows, and the exclusion

of the implicit safety margin included in

technical provisions through prudent andcautious assumptions, partially offset by

the inclusion of an explicit risk margin.

Based on the amount of the illiquidity

premium risk sub-module in the SCR, the

effect of the introduction of the illiquidity

premium in the valuation of technical

provisions in QIS5 can be estimated as

being almost 1% of the value of technical

provisions (which represents around

15% of SCR). The impact is quite low as

compared to the expectations and may

raise issues about cost verses benet.

The most common products (wheredifferent levels of illiquidity premium was

applied):

• where 50% of the illiquidity premium

was used were nonlife in general,

unit- and index-linked business,

life without prot participation, SLT

health, (health insurance which is

pursued on a similar technical basis

to that of life insurance) non-SLT

health and reinsurance (both life

and non-life).

• where 75% of the illiquidity premium

was used were life insurance with

prot participation in general, pure

savings products, unit- and index-linked insurance with guarantees,

and various types of annuities.

• where 100% of the illiquidity

premium was used were different

types of annuities (including

annuities from non-life)

It is clear that illiquidity premium has

not been applied consistently by the

participating rms and there are number

of areas that need clarication.

A number of areas have been identied,

by EIOPA, which might need further

development:• The Risk Margin calculation, as

provided by the full approach, seems

overly complicated, leading to a

very large use of the simplications

provided. Further guidance on

simplications will be needed

for ensuring consistency in the

calculation throughout Europe. No

major concerns have been raised

with regards to the cost of capital

factor (6%), which is surprising

considering the fact companies

having different capital structurewould expect to have different cost

of capital.

• The denition of the contract

boundaries seems to be unclear.

This leads to signicant differences

and a potential unlevel playing eld.

Further clarication will have to be

provided, taking into account where

relevant and appropriate the work

undertaken by the IASB.

• Given the inconsistent application

of the illiquidity premium buckets

across insurance undertakings,detailed guidance may be issued on

what products attract the illiquidity

premium and to what extent.

• The interpretation and calculation

of unavoidable market risk (median

result was less than 5% of total

risk margin for the UK rms).

There was no detailed guidance

in the technical specications on

how to interpret and calculate

unavoidable market risk. Almost all

non-life undertakings followed the

simplications stating that it is likely

that this unavoidable market risk

is nil for them. Life undertakings

calculated unavoidable market risk

when the duration of their liabilities

was longer than the maturity of

F E A T U R E S




assets on an active market and used

different approaches to calculate the

amount.

• The “real” (i.e. net from intra-group

transactions) diversication benets

are mainly observable in the market

and non-life catastrophe modules.

Strong concerns have been raised

with regard to the catastrophe

scenarios for non-life business, in

respect of the calibration, as well

as the complexity and availability of

data. None of the methods proposed

was free of concerns, and further

work is needed.

Internal models

For QIS5, undertakings that are

developing full or partial internal models

were asked to calculate the SCR both

with the standard formula and with the

internal model. Additionally participants

were asked to provide quantitative data

in order to allow the impact of the use

of internal models on solo undertakings’and groups’ capital requirements to be

assessed.

From the qualitative questionnaires it was

found that:

• 262 undertakings (out of 309 which

answered the question) were already

using internal models for some

individual aspects of their business;

• 289 undertakings were currently

working on the implementation of

their internal model for Solvency II

purposes.

Solo undertakings which were part of

groups for the most part declared that

they would be using internal models

developed at group level; 159 out of

166 (96%) undertakings answered that

they used the same methodology as the

one used in the internal model for the

calculation of the group SCR.

Participants reported the following main

reasons for using internal models instead

of the standard formula:

• internal models better reect the

undertakings’ specic risk proles,

additional risks are covered by the

internal model beyond those covered

by the standard formula;

• the internal model applies a more

granular aggregation method than

the standard formula;

• the standard formula does not take

into account volatility

EIOPA’s view is that changing the

parameters of the standard formula

themselves should not be considered

as internal modelling and does not

comply with the Solvency II requirements

regarding internal models.

The most common method for producing

the probability distribution forecast

mentioned by undertakings was Monte

Carlo simulation. Reports of the number

of simulations used varied widely, from

10,000 to as many as 100,000 (the

median was 25,000 simulations).

In most cases undertakings reported

taking into account the following future

management actions in their internal

models:

• changes in asset allocation;

• changes in future bonus rates;

• changes in product charges or

expense charges;

• changes in their reinsurance

programme;

• dynamic hedging; and

• run-off decisions.

Some undertakings stated that in

extreme scenarios, management actions

may also include exceptional actions,

such as closure to new business.

Most undertakings use the same risk

measure, condence level and time

horizon for economic capital in their

internal models as dened in the SolvencyII Directive: 99.5% VaR over one year.

Some common examples of validation

tools (programs designed to gain comfort

that the internal model is appropriate

and reliable) mentioned by undertakings

include:

• back testing;

• sensitivity testing;

• stress and scenario testing;

• prot and loss attribution;

• benchmarking; and

•

analysis of change.In QIS5 234 undertakings (about 10% of

all participating undertakings) provided

overall SCR results calculated by internal

models. Comparison of the internal

model SCR and the standard formula

SCR (based on the small sample) shows

that the median of the ratio of SCR using

internal model to SCR using standard

formula, was 91% and the weighted

average was 99%. For large and medium

undertakings the median of the ratio

was 93%, and for small undertakings

the median was 101%. For groups, the

median of the SCR calculated via internal

model is about 80% of the one deriving

from the standard formula.

Summary

QIS5 has shown that Solvency II will be

more onerous than the existing regime.

However, the EU insurance industry as a

whole remains sufciently well capitalised

and in a strong position. QIS5 shows that

the European insurance industry has high

quality capital, with 92% of the available

capital being classed at the highest

quality possible. The results show that, at

present, 15% of European insurers would

fail to meet the minimum requirements

and close to 5% would risk having

their licenses withdrawn. A number of

insurance groups covered by Solvency

II may streamline their UK and possibly

European group structures, which under

the QIS5 standard formula measurement

have attracted an additional capital

charge.

Solvency II presents an opportunity

for companies to reduce capital and,

optimise available capital and align their

group structures and this may lead to an

increase in M&A activity. In the short term

the compliance cost may increase due to the signicant work required to achieve

Solvency II standards. Insurers may review

their investment and debt-nancing

strategies as certain asset classes and

debt instruments will carry higher capital

charges or be classied differently under

the directive. Additionally, higher capital

charges will mean certain products

become unprotable, leading insurers to

stop writing certain classes of business or

re-designing some products. The results

may also impact some rms’ decision to

seek approval for the use of an internal

model.

QIS5 was planned to be the last

opportunity before the implementation

of Solvency II, in January 2013, to

undertake such a fully comprehensive

exercise. QIS5 results will have signicant

impact on the delegated acts, technical

standards and level 3 guidance, required

for implementing Solvency II. However,

since then, the European Commission

and the European Parliament have both

indicated that full implementation of

Solvency II will be delayed until 1 January

2014. The implications of this areunknown at the present time. Whatever,

happens, the run up to Solvency II

implementation will remain challenging

due to other regulatory changes being

planned around the same timeframe –

Retail Distribution Review in the UK, EU

directive to ban use of gender in pricing

of insurance contracts and IFRS Phase 2.

About the author:

Gautam Kakar is a Principal Consultant

and qualied actuary working for the

Actuarial & Insurance Management

Solutions (AIMS) practice of PwC in

London. Gautam specialises in business

management, strategy development

and execution, governance, product

development and nancial modelling

having worked as Business Leader and

experienced in life, non-life, benets and

wider nancial modelling.

[email protected]

F E A T U R E S




q&A SESSION: PETER DOYLEPRESIDENT – ACTUARIAL SOCIETY OF SOUTH AFRICA

The following interview was published in-house by Actuarial Society of South Africa in August 2011.

Peter, for starters, can you proide some

background on your journey through the

corporate orld in South Africa?

vI got a bursary from Homes Trust Life,

and completed my B.Bus.Sc. in Actuarial

Science at UCT. I then went to work in

London for a year. Back in South Africa

I joined Homes Trust Life (which later

became Metropolitan Life), qualifying as

an actuary in 1983. The rst 3 to 4 years

were straight valuations work, which I still

believe to be foundational. I then spent a

couple of years as a pricing actuary and

marketing actuary, followed by working

in corporate marketing and strategic

planning. From there I became GM of

Finance at Metropolitan, and started with

AIDS modelling on the side. That became

like a parallel career after 1987 when I

went over to the US to attend a seminar

on the HIV epidemic, which developed my

interest in the AIDS modelling work. I went

back to Montreal in 1992 to present theAIDS model at the International Actuarial

Congress. At Metropolitan I got involved

with setting up Metropolitan Employee

Benets, and Metropolitan Health. I went

on to become CEO of Metropolitan in

1998, being 42 years old at the time, and

held that post for 10 years.

were you inoled in ASSA matters prior

to becoming the president-elect?

v I have had three major roles with

ASSA prior to becoming president-elect.

I was on the AIDS Committee for 10

years and convenor of the committee

for much of that time. I was also on the

Life Assurance Committee for about 8

years during the Financial Soundness

Valuation development and the early

days of EV. Then in the mid-90s I was on

Council for 4 years.

what motiated you to take on the

position of the president of ASSA?

v I became president-elect in my last

year at Metropolitan. I already had the

awareness it would be quite difcult

to take on the presidency role and bechief executive of a nancial services

company. The motivation stems from

taking on the establishment of FASSA

and adopting that framework in South

Africa. I have never lost my actuarial

roots; I’m probably rst and foremost

an actuary. The other motivating factor

was the move for ASSA to become an

independent actuarial professional body.

Over the last 10 years the International

Actuarial Association (IAA) has developed

into a dramatically different organization,

and so ASSA is now a full international

participant in actuarial matters.

Is the role of president-elect that

different from being the president?

v Should I tell Themba? I don’t want

to scare him off just yet. I guess it’s the

difference between deputy CEO and

CEO… it actually does stop at your desk.

It’s a lot of work, actuarially speaking

it’s about 3 days a week but it does

uctuate. It’s more than a part time job,

it’s a commitment. We have been doing a

lot of work looking at the business model

of the Actuarial Society. We’re at that

classical stage of going from a very small

business to a medium sized business -

you have all these growing pains and

resource issues. We have been putting

a lot in place this year to try and make

the governance process more effective

and efcient. There’s much more clarity

of roles, responsibilities and delegative

authority that you wouldn’t necessarily

need in a small organization, but

becomes critical in a medium-sized body.

what is the biggest challenge facing

the actuarial profession in South

Africa?

v This is a classic question for which

I should have a slick answer. There are

two things; rst, due to the nancial

crisis there will be a dramatic increase

in regulation. Funny enough the risk is

that actuaries move into an increasingly

complex mindset – that our response to

this tremendous pressure of legislation

is to reciprocate with over-complexity.

The opportunity is that if we understand

the policy intentions of regulators, then

we can work with them and not against

them. We have a tremendous opportunity

in South Africa in that National Treasury

have published their policy framework

(the so- called “Twin Peaks” policy

framework), and it’s by far the most

clear, single policy document that I

have ever seen. You might agree with it

or not, but it’s a brilliantly clear policy

document and that helps tremendously

while you are developing things so you

can see where you are going. The second

risk, and opportunity, is the question of

systemic risk. The opportunity is that

actuaries are uniquely placed to talk

about systemic risk. South Africa is alsouniquely placed in that it is a gateway

to Africa. Over the last 5 years you have

seen a complete watershed change of

power from the developed world to the

developing world. South Africa is now

ofcially part of the BRICS countries, but

only because we are a proxy for Africa.

We are uniquely placed in that we have

rst world links (our nancial system is a

rst world based framework), situated in

a third world market. We therefore have a

lot to offer, on both sides of the equation.

Banking enironment?

v Yes. Banking needs complex

modelling skills and we have them. Garth

and I have been quite involved with the

global CERA development, and talking to

our colleagues overseas they say there

are big opportunities for actuaries to be

modellers and risk ofcers in banking.

But in South Africa, that’s what actuaries

already are doing! We have some very

signicant actuaries in signicant banks.

Probably more so than any other country

I know, apart from possibly Australia

which is in a similar situation.

DoyouthinktheAssociatequalication

ill help to make the transition into the

bankingenvironmentandwiderelds?

v Yes, that is the intended purpose.

We have now become a fully edged

participant of the IAA, and internationally

a fully qualied actuary is an Associate

actuary. I think the best analogy to

illustrate the concept is the medical

profession. So an Associate is a doctor,

and a Fellow is a specialist. So consider

that specialists tend to stay in their

eld of specialty, while doctors go

wider. Associates can go into banking,

healthcare, or even into the energy eld.

Obviously the biggest application of the

associateship will be in investments. For

PETER DOYLE

President

Actuarial Society of South Africa

I N T E R V I E W




I N T E R V I E W

example a fantastic qualication would

be an Associate actuary plus a CFA, so

you could understand the asset and

liability side.

More generally, should the actuarial

community be taking on leadership

rolesinthenancialservicesindustry?

what skills do e offer besides our

technical abilities?

v The obvious answer should be yes,

but it’s yes with two caveats. Firstly,if we consider the numbers, South

Africa has roughly 25,000 chartered

accountants. The IAA represents in

the order of 40,000 actuaries globally.

Realistically, we are talking about a

signicantly smaller profession than

most. The second point is that if you

are getting into management or other

elds, particularly at a leadership level,

your actuarial mindset never leaves you

but you have to develop other skills.

You won’t become the CEO of a bank

because you are an actuary, it will bebecause you have others skill which your

actuarial skills might complement. The

two skills that one needs are business

context and communication. Two-way

communication skills to be more precise,

actuaries are not always good at the two-

way part. An actuarial qualication is a

passport to certain key jobs, but not all.

what is your take on actuaries

proiding alue in the public ersus the

priate sector?

v I really think actuaries can play a

very signicant role in the public sector.We did some work on Council this year to

identify the uniqueness of the actuarial

profession, and the core skill is dealing

with complex nancial systems with

uncertain outcomes. Interestingly, the

other key skill is that we blend nancial

parameters with human parameters. It’s

the intersection between nance and

people. Mortality, disability, lapse rates –

that’s all modelling human behaviour. On

the nancial side we’re modelling assets

and liabilities. It’s the only profession

which does both. As actuaries we have aunique opportunity to participate in the

public space and discourse.

Currently, actuaries probably hae

more inuence in technical roles

rather than in leadership positions

on a national leel – should e not

be putting more input into matters of

nationalsignicance?

v The Actuarial Society should be

doing that, and that’s been the single

biggest topic of conversation on Council

this year. ASSA should be playing a

facilitation/consultation role as subjectexperts, not a lobbying role which

has a particular connotation as being

the opposition. There has to be some

political sensibility that you tie into that.

It should be a bigger role than we are

currently playing.

Do you think South Africa should hae

a Goernment Actuary’s Department

much like the UK?

v It’s one of the directions. What it

involves is putting a couple of skilled

people in positions of inuence within

government. One of the problems is that

we talk of the private and public sector

as if they are opposites, but when we talkabout national policy we have the same

interests e.g. to grow the economy, to

create jobs etc. An actuary is somebody

with skills that are widely transportable. If

the government would like a Government

Actuary’s Department, then we would

support it.

Is the actuarial profession insulated

from global moements like the

emergence of China and India as

nancial powers – will this have

impacts on actuaries in South Africa?

vThat’s an interesting question. I can’t

talk much about China, but they have just

joined the IAA and our rst interaction

with them was at the last IAA meeting in

Sydney in April. One thing I can say is that

they did a wonderful audio presentation

on the actuarial profession in China,

in which they carefully explained to

everybody that actuarial science was

actually invented in China 5,000 years

ago. As for India, their convention is

called the Global Congress of Actuaries.

I presented at their Congress this year

and in his opening address the Instituteof Actuaries of India (IAI) president,

Mr. Liyaquat Khan, elaborated that

it’s referred to as a “Global” congress

because the Indian nation is a nation of

diaspora. So there are Indian actuaries

all around the world, not just in India.

The vision of the IAI is to have 20,000

Fellow actuaries in due course, and

these will be actuaries working anywhere

in the world or actuaries working in India

for companies anywhere in the world.

Already a fairly signicant number of

Indian actuaries are working on SolvencyII for European companies.

I collected some numbers while I was

there, as actuaries do, and there are

about 250 qualied actuaries in India

and 6,000-12,000 students. Mentoring

such large numbers of students will be

the challenge for them. Similarly in China,

there are a couple of hundred actuaries

and 8,000 students.

what is your ision for the actuarial

profession in South Africa?

v Our vision is that actuaries are

known by our key stakeholders as people

that can add value to complex nancial

problems. That sounds quite simple, but

there’s a lot that goes with it. It covers

education, it covers our branding, and it

covers our relationship with clients and

key stakeholders. I don’t think there is

any value in us communicating to the

whole population what actuaries will

do, we must communicate with our key

stakeholders. There are only so many

people we can service and interact

with, and they themselves are key

people. As long as we know who our key

stakeholders are, and they know what we

can do, then the job is largely done.what adice ould you offer actuaries

that are interested in getting inoled

in ASSA matters?

v Get involved. One of the difculties

at the moment is that we probably have

more people wanting to get onto technical

committees that we can accommodate,

and fewer people in the other support

areas than we need. Some of the other

areas are just as interesting as the

technical committees. There are only so

many people you can have on LAC, but

getting involved in Stakeholder Board(we are busy there with brand building

and chatting to stakeholders and the

FSB) can develop your wider skill sets as

we discussed earlier. It puzzles me that

people steer clear of those wider eld

activities in ASSA. I often get asked what

the secret to becoming a CEO is, and I

respond that I have no idea! The only

principle that seemed to have worked for

me is that I always did more than what

is expected, just because I was always

interested in doing more and looked to

push the boundaries of my role.Areyouofciallyretired?Finally,what

isnextforPeterDoyle?

v What does retirement even mean?

That’s a whole discussion on its own.

Consider the whole worldwide trend

of older retiring ages, in Europe they

are talking about age 67 and in New

Zealand they have ofcially abolished the

retirement age. Technically, I’m a retired

member of the Metropolitan Pension

Fund, but that’s the only requirement for

retirement that I’ve fullled. I still work,

I’m still involved, I’m not 60 and I expect to be involved for much longer than

60. So in short, I don’t qualify as being

retired. I will still be involved in ASSA,

mostly in my leadership role of the IAA’s

Professionalism Committee. I also have

several other board positions. I’m a strong

believer that when the new president of

ASSA comes on board, that the previous

president makes way – Themba I’m sure

will do a great job. Personally, I’m looking

forward to my free time again ... maybe

have another sabbatical, and some

reading, research and consulting work. Ihave found reading and research to have

been a motivating factor throughout my

career.




he Insurance Regulatory and

Development Authority (IRDA)

recently introduced an exposure draft

altering the norms for an appointed

actuary. The insurers have welcomed

the move hoping that it will be helpful

for general insurance industry in lling

up the gap of qualied actuaries.

According to the exposure draft, the

appointed actuary shall be a full- time employee of a general insurance

company. At present, majority of

the general insurance companies

have consultant actuaries currently

and only around 5 to 6 companies

have full-time appointed actuary.

The draft mandates that the person

eligible as an appointed actuary of

an insurer shall not exceed the age of

70 as on October 2012. The person

should not be over the age of 65 which

will be effective from October 2013.

He should have served the industryfor more than 10 years and the

DNA; September 30, 2011

Aswathy Varughese & Yogini Jogleka:

same company for at least 2 years.

Five years of experience is also

required after becoming the fellow.

The regulator had invited comments

from insurance companies on the same.

Says, Satyan Jambunathan, senior

vice president & head- nance, ICICI

prudential life “I am positive about

the norms that regulator have come

up with. Non-life industry is facing achallenge in the availability of qualied

professionals. The recent regulation

will be the solution as it demands

the service of full-time actuaries

for the general insurance industry”

Actuaries mathematically evaluate the

probability of events and quantify the

contingent outcomes to reduce losses.

General insurance business is

growing at a healthy pace in India. The

industry demands more qualied and

experienced professionals who do the

pricing and risk management for theindustry. Life insurance industry already

T has a bigger actuarial team compared

to the general insurance industry.

“Qualied set of actuaries are the need

of hour for better pricing and deal with

the administration risks of the insurance

industry. The impact will be more on

general insurance company,” says

Monish Shah, Director Delloite India.

“Relaxation of eligibility criteria for

afliate members may favour moreof foreign actuaries. Experience

requirement need to be altered

for favouring more qualied Indian

professionals,” says GN Agarwal, chief

actuary, Future Generali Life Insurance.

“The regulation welcomes more

experienced and qualied professionals.

We hope that many people of Indian

origin currently working abroad will

come and bridge the gap here. The

norms are favouring young professionals

in the industry,” says Amarnath

Ananthanarayanan, CEO & managing director, Bharti Axa General Insurance.

IAA news release: September 27, 2011

Iaa aND ISSa SIgN MEMORaNDuM OF

uNDERSTaNDINg IN gENEva

T he International Actuarial Association

(IAA) and the International Social

Security Association (ISSA), the rst

Institutional Member of the IAA,

executed a formal Memorandum of

Understanding (MoU) in Geneva on

September 23. Founded in 1927,

ISSA is a non-prot international

organization, which brings together

institutions and administrative bodies

involved in administering social

security from countries all over the

world. As the independent voice of

social security, ISSA assists members

and policymakers to face challenges

and develop social security systems

through platforms of cooperation and

research, knowledge production and

transfer and the promotion of social

security at the international level.

The purpose of this MoU is to set out

the terms of an agreement between

IAA and ISSA that creates the

framework for cooperation between

the parties to benet from commonareas of activity in their respective

strategies and operations. Key

elements of the joint programme of

cooperation include:

NEw NORMS ON aCTuaRIES BODE wEll FOR

gENERal INSuRERS

T H E P R E S S

F R O M




• Organization of joint ISSA/IAA events

• Exchange of information and

publications

• Participation in events organized by

one of the parties

• Organization and publication of joint

studies

• Representation in the relevant

committees and working groups of each party

This MoU represents a continuation

of outreach activities arising from the

key objectives of the IAA Strategic Plan

that include establishing, maintaining

and extending cooperative relationships

with major supranational organizations,

with a particular emphasis on those

areas where actuarial input is a

signicant factor inuencing decisions

on important social and economic issues

with a global impact. This memorandumof understanding formalizes the mutual

cooperation between the IAA and ISSA

in a way that transcends the tenure

of particular individuals involved in

the relationship from time to time,

and will ensure a continuation of the

relationship independent of the tenure

of key individuals.

To learn more about the work of

the IAA in this area, contact the IAA

Secretariat, care of the Chairperson

of the Supranational Relations

Subcommittee

IAA news release: September 27, 2011

Iaa PaRTICIPaTES IN JOINT DISCuSSION FORuM wITH

IlO, ISSa aND wHO IN gENEva

a

six-person IAA delegation

participated in a joint discussionforum on social security and health care

nancing topics with the International

Labour Organization (ILO), International

Social Security Association (ISSA) and

the World Health Organization (WHO) on

September 22 at ILO headquarters in

Geneva. A total of fourteen participants

from the four organizations engaged in

a full day of discussions that included

the following topics:

• extension of social security

coverage

• the concept of a social protectionoor

• assessment of coverage gaps

• peer review and actuarial

assessments of country

programmes

• education and training programmes

for social security actuaries

• actuarial capacity-building indeveloping countries

• sustainability and nancial stability

of social security programmes

• guidelines and standards for social

security, including unemployment

insurance administration,

• nancing of health care delivery

systems

• country-specic models for national

health insurance and other forms of

health care nancing

• population issues and impacts of ageing and migration on social

security and health care

• importance of fertility and long-

term economic factors in nancial

projection methodology

• social security systems’ high-

priority needs and requests for

international standards of actuarialpractice

• the role of regional development

banks in Latin America, Asia and

Africa.

This joint discussion forum is the

second annual forum to be held at ILO

headquarters in Geneva and represents

a continuation of IAA’s strategic outreach

activities to establish, maintain and

extend cooperative relationships with

supranational organizations. The forum

provided an opportunity to identify

several areas for future collaboration

with and between the participating

organizations.

To learn more about the work of the IAA

in this area, contact the IAA Secretariat,

care of the Chairperson of the

Supranational Relations Subcommittee

IAIS Press Release; 1 October 2011

IaIS FOCuSES ON FINaNCIal STaBIlITy IN

ITS 2010/11 aNNual REPORT

T he role that the IAIS plays in

promoting nancial stability is an

important one, and one that is constantly

evolving in response to developments

in the economy and nancial markets,

writes the International Association of

Insurance Supervisors (IAIS) in its latest

Annual Report. The IAIS approved its

2010/11 Annual Report for release at

its Annual General Meeting (AGM) inSeoul, Korea on 1 October 2011.

Peter Braumüller, Chair of the IAIS

Executive Committee, says: “Last year

was a year of growth and development

for the Association mainly due to

increased external demands and

expectations arising from nancial

stability issues, which the Association

met with internal and structural changes

designed to improve our resilience

and responsiveness in light of current

challenges...”

The report outlines the Association’s

work related to nancial stability,

including the development of a

methodology to identify potentially

systemically important insurers (G-SII),

possible supervisory measures to

address any systemic concerns, and

appropriate resolution mechanisms

in the insurance context. It further

describes progress made on thedevelopment of the Common

Framework of the Supervision of

Internationally Active Insurance Groups

– “ComFrame.” The report also points

to initiatives launched to strengthen the

effectiveness of insurance supervision

and to foster convergence.

Yoshihiro Kawai, the IAIS Secretary

General, said during the AGM: “The

Association is always mindful that

standards without solid supervisory

practice and implementation have

limited impact in the real world.”

The 2010-2011 Annual Report is available on

the IAIS website at http://www.iaisweb.org/

Annual- reports-44.

T H E P R E S S

F R O M




T H E P R E S S

F R O M

Secretariat: 601–150 Metcalfe, Ottawa, ON Canada K2P 1P1 Tel.: +1-613-236-0886 Fax: [email protected] / [email protected] — www.actuaries.org / www.actuaires.org

ASSOCIATION ACTUARIELLE INTERNATIONALE

I N T E R N A T I O N A L A C T U A R I A L A S S O C I A T I O N

Ottawa

October 6,

2011

PRESS RELEASE

Private Sector Task Force calls on G‐20 to promote Regulatory Convergence

The Private Sector Task Force of Regulated Professions and Industries (PSTF) has released its final report to

G‐20 Deputies. The PSTF was established in May 2011 at the request of the Presidency of the G‐20 to provide

an analysis of gaps in regulatory convergence and to make recommendations on how to close such gaps across

a number of professions and industries that operate within the financial sector.

In addition to the International Actuarial Association (IAA), the membership of the Task Force includes:

International Federation

of

Accountants

(IFAC,

that

also

provided

logistical

and

administrative

support

for

the

Task Force), CFA Institute (CFAI); INSOL International; Institute of International Finance (IIF); International

Accounting Standards Board (IASB); International Corporate Governance Network (ICGN); International

Insurance Society (IIS); and International Valuation Standards Council (IVSC).

IAA President Cecil Bykerk stated "We hope that the G‐20 Deputies will find this report clear in setting out

practical steps that the G‐20 should take to promote regulatory convergence in the financial sector ."

PSTF Report recommendations call for the G‐20 to maintain its momentum and ambition for global regulatory

reform and convergence and to discourage unilateral national regulatory reforms that are inconsistent with

international standards. The PSTF recommends the G‐20 to encourage and support the development,

adoption, implementation

and

consistent

interpretation

of

globally

accepted

high

‐quality

international

standards, to the greatest extent possible, for each of financial reporting, auditing, valuation, and actuarial

services. Additionally, the report stresses the necessity of open communication and transparent processes as

well as continued cooperation and enhanced consultation between regulators and professional and industry

groups in developing and implementing effective regulatory reforms.

IAA Past President Paul Thornton said "The IAA particularly supports the recommendations to encourage

convergence of financial reporting, auditing, valuation and actuarial standards, and the encouragement for

implementation of the IAIS Insurance Core Principles and Common Framework for the Supervision of

Internationally Active Insurance Groups."

The International

Actuarial

Association

(IAA)

is

the

worldwide

association

of

professional

actuarial

associations,

with a number of special interest sections for individual actuaries. The IAA exists to encourage the

development of a global profession, acknowledged as technically competent and professionally reliable, which

will ensure that the public interest is served.

Contacts: Mrs. Nicole Séguin

IAA Executive Director

1‐613‐236‐0886 ext 123

Email: [email protected]

Website: www.actuaries.org




T H E D E S K O F

F R O M

FROM THE DESK OFCHAIRPERSON - ADvISORY GROUP ON PENSION,OTHER EMPLOYEE BENEFITS &SOCIAL SECURITY (PEBSS)

K SUBRAHMANYAM

[email protected]

T his group appears to be well known

more with consulting actuaries

than with the students and associates.

Members of the profession should, I feel,

know about the Advisory Group created

by the Institute for and to the benet of

members and also what it does.

Functions of this group can be viewed

from the Institute’s website at www.

actuariesindia.org/peb-ss.html .

In brief, the group is dened to take

care of interests of those actuaries who

are consulting actuaries associated

with pension, employee benets and

social security scheme. The group is

responsible for suggesting the Syllabus

of SA4 to the Institute. It also conducts

seminars every year on the current

issues in retirement benets (CIRB,popularly known). It also drafts Guidance

Notes (these are nally approved by

the Council after consultation with the

members of the profession) to help the

actuaries to perform their functions in

the best interests of customers. Major

activity of consulting actuaries is to

certify the accrued liabilities of dened

benets specied in the Accounting

Standard 15-Revised 2005 (AS15-R)

issued by the Institute of Chartered

Accountants of India -----This is highlyremunerative job. All employers who

provide dened benets are required

to get the certicates from actuaries in

accordance with AS15-R. Since these

actuaries advise the public, guidance

notes play important role and guidance

notes really guide the consulting

actuaries.

Every year CIRB is conducted for the

benet of consulting actuaries. In

October, 2010, this group conducted

a seminar on CIRB; next one is due in

Nov, 2011. Focus of that seminar was

to help the employer to design better

benet packages to their employees and

the actuary’s role in that. Still details

of the seminar with presentations are

available in the Institute’s website. It is

similar to an insurer’s product. Various

employee benets include ‘pension’ [a

voluntary scheme adopted by employer

to retain staff], ‘gratuity’ [a mandatory

benet as per Payment of Gratuity Act,

1972], ‘leave encashment’ [a voluntary

scheme of employers to benet the

employee], and ‘compensated medical

absences’. In the regular work of a

consulting actuary, he/she is required

to know (1) company’s schemes which

provide dened benets; (2) statutory

benets such as gratuity and provident

fund; (3) income tax laws governing the

schemes; (4) Accounting Standards;

and (5) Guidance Notes of IAI.

International Actuarial Association

has a wing Pension, Benets and Social

Security (PBSS). Details are available on

their website. Internationally, actuarial

assumptions are discussed---how,

why, and what---rate of discount can

be used; salary escalation, mortality/

morbidity rates, accounting practices

while reporting. This body produces

educational notes on many areas---

pension and social security, particularlywhen actuaries advise government

bodies. In this association, IAI is a

member participating in its various

seminars/conferences.

Opportunities: are plenty. Some of our

actuaries’ advice insurance regulators

(in India and outside India), and clients

on wider elds such as M & A, stock

options, warranties, and EVs. Though

the group’s activity is conned to the

above, actuaries gain lot of knowledge

using the experience acquired in these

areas. There are consultancy rms run

by actuaries who employ students,

associates and fellows to do various

consultancy jobs. Some well known

names in this eld are KA Pandit

Consultants and Actuaries, Thanawala

Consultancy Services, Charan Gupta

Consultants Pvt. Ltd., E&Y, Tower

Watson, etc. Sole-proprietorship rms

also exist in India, where actuaries are

engaged in consultancy alone. [Author isa consulting actuary doing consultancy

alone, for instance].

vision: IAI to be a globally well recognized professional organization developing enduring thought leadership in managing

uncertainty of future nancial outcomes.

Mission: 1. To educate/train risk professionals 2. To enhance and maintain high professional standards 3. To shape Public

Policy and Awareness 4. To engage with other professional/regulatory/government bodies 5. To promote/build IAI as a

respected brand of risk management globally 6. To promote research to advance actuarial science/application.

values : 1. Integrity 2. Respect for other’s views 3. Accountability 4. Continuing Learning/Research Oriented 5. Transparency

6. Be Responsive/Sensitive.

DRAFT vISION, MISSION AND vALUES STATEMENTS OF IAI




THE FuNDaMENTalS OF PENSION MaTHEMaTICS

By BaRNET N BERIN

Reviewed by Suresh Sindhi

[email protected]

was about to start my journey by car

from Mumbai to Pune on Saturday

morning when I received a book titled “The

Fundamentals of Pension Mathematics”

for review. I decided to review it during my

journey which I thought would take three

hours to complete.

This edition of the aforementioned book

is the latest revision of a work rst printed

in 1971 under the sponsorship of the

Committee on Continuing education of the

Actuaries’ Club of New York and publishedin 1989 under the sponsorship of Society

of Actuaries by Barnet N. Berin, FSA.

The book is split into thirteen chapters.

Introductory chapters cover the denition

of Funding Methods, reason, selection and

description of Standard Funding Methods

such as Unit Credit, Individual Entry Age-

Normal, Entry Age Normal-Frozen Initial

Liability, Attained Age Normal-Frozen Initial

Liability and Aggregate Cost methods.

I

Book Number : B11127

Status : Available at IAI Library

These chapters also cover the roles of assets and development of assets at book

value and market value alongwith the

analysis of Asset Gain and Loss.

Subsequent chapters cover the signicance

of Actuarial Gain and Loss. Actuarial Gain

and Loss has been further split into 1.

Gain and Loss arising because of deviation

between Actual experience versus Expected

experience. 2. Gain and Loss arising

because of changes in assumptions.

There is a short chapter on ancillary

benets such as disability benets, life

annuity benets to a surviving spouseand benets for multiple retirement ages

instead of single retirement age.

One chapter is devoted to treatment of

contributions payable into the pension fund

by plan sponsors and the employees from

tax deduction perspective in US, UK and

Canada.

This book has also covered optional

benets such as 1. Reduced level of

benets at early retirement date in place

of a larger, accrued benet payable at

normal retirement date. 2. Reduced benet

payable at normal retirement date to a

retired participant with some percentage of

this benet payable to a surviving spouse.

There is a chapter dedicated to the role

of the Actuary in handling Multiemployer

Pension Plans alongwith challenges faced

by the Actuary in handling such types of

plans.

The last chapter covers the pension

accounting as per US Financial Accounting

Standards 87 which chooses the Projected

Unit Credit funding method as the sole

approach to developing Accrued Liabilities

and Current Service Cost in determining

pension expense and balance sheet

liabilities.

All the chapters are followed by problems

and their solutions. Most of the formulae

derived in this textbook have used

Commutation functions.

I reached Pune safely and completed

reviewing the book at the same time.

In summary, this book is good for beginners

who want to understand the basic actuarial

mathematics used in pension area and

who want to learn about standard funding

methods, analysis of Actuarial Gain and

Loss and the accounting treatment of

pension liabilities.

few years ago, rst time when I

heard about microinsurance, the rst

question that crossed my mind was

whether the poor really wanted any kind

of insurance. More important priorities for

them may be food, clothing, and shelter.

You may nd many educated, urban, rich

people who are not convinced of the valueof insurance, how this idea of insurance for

the poor may work?

In fact, the annual report 2010 of the

Microinsurance Innovation Facility does

identify fundamental questions regarding

viability and client value: 1. Do low-income

households benet from insurance (ie client

value)? 2. Is the provision of insurance to

the poor viable (ie viability)?

The report is very well organized. It covers

the vision, strategy, activities, achievements

and challenges of the Facility concisely

in 60 odd pages. Details on partners,projects, studies, etc have been organized

in annexures for easy reference.

The Facility was launched by the

International Labour Organization (ILO)

PROTECTINg THE wORkINg POOR – aNNual REPORT 2010 PuBlISHED By IlO

Reviewed by Kamlesh Gupta,

[email protected]

with funding from the Bill & Melinda

Gates Foundation. It has developed a

knowledge management framework and

its activities within the framework have

two main threads: knowledge capture and

knowledge sharing. The annual report has

also been structured accordingly.

Knoledge Generation & Capture

The objective of knowledge generation

is achieved thorough innovation grants,

research grants, commissioning

of longitudinal studies and project

assessments. Some of the topics on which

studies have been done seem to be very

interesting e.g. gender and microinsurance,

microinsurance in Africa.

The Facility has its own knowledge

management portal which is used by

its partners and grantees. The portal’s

Learning Diary tool is used to capture the

lessons that a project generates while

working towards its milestones. The report

makes it easy to understand such tools by

providing a brief introduction and also a

sample.

The Facility has started putting greater

emphasis on health microinsurance. Also, there is greater importance attached

to the use of technology because it can

help organizations reach large number of

households.

KNOwLEDGE SYNTHESIS & SHARING

This section coers an outline of the

Facility’s knoledge sharing strategy

and then describes its main knoledge

sharing actiities – synthesizing and

packaging knoledge, disseminating

knoledge and building capacity.

The main products of knowledge synthesis

activities are publication, bite-sized

lessons & videos. Key tools for knowledge

sharing are publications and videos,

media coverage, website, conferences &

workshops and social-media platforms like

LinkedIn. As regards capacity building, the

Facility has decided to focus on its core

competencies, namely, advisory services,

professional development & training.

Oerall, the report is an interesting read

and also inspirational in some ays. It

is recommended for people ho ant a

uick introduction to the uiet reolution

taking place in the microinsurance sector.It is also recommended for people ho

are interested in knoing ho innoation

can create ays here there ere none.

a

Book Number : B11231

Status : Available at IAI Library

B O O K R E V I E W




11. Once again you state that there will be

no remainder, and this also proves correct

(56,342 divided by 11 is 5,122).

With your back still turned, and no

knowledge whatever of the gures obtained

by there computations, you direct a fourth

spectator, D, to divide the last result by 13.

Again the division comes out even (5,122

divided by 13 is 394). This nal result

written on a slip of paper which is folded

and handed to you. Without opening it you

pass it on to spectator A.

“Open this,” you tell him, “and you will nd

your original three-digit number.”

This trick cannot fail to work regardless

of the digits chosen by the rst spectator,

why?

Solutions

Puzzle No 157:

One rectangle with sides 6 units and 3 units

and the other one with side 4 units(square)

each

Puzzle No 158:

The time during which the plane’s speed

is boosted is shorter than the time during

which it is retarded, so the over-all effect

is one of retardation. The total travel time

in a wind of constant speed and direction,

regardless of the speed or direction, is

always greater than if there were no wind.

Correct solutions were received from:

Puzzle No 157:

1. Suresh Sindhi 2. T. Subramanya Sastry

3. Prasham Rambhia 4. R. Krishnaswamy5. V. Parasurambabu 6. Gaurav Dugar

Shilpa's

Puzzles

Puzzle No 161:

Thirteen boys and girls wait to take theirseats in the same row in a movie theater.

The row is thirteen seats long. They decide

that after the rst person sits down, the

next person has to sit next to the rst.

The third sits next to one of the rst two

and so on until all thirteen are seated. In

other words, no person can take a seat

that separates him from at least one other

person. How many different ways can this

be accomplished, assuming that the rst

person can choose any of the thirteen

seats?

Puzzle No 162:

An unusual parlor trick is performed as

follows.

Ask spectator A to jot down any three-digit

number, and then to repeat the digits in

the same order to make a six-digit number

(e.g., 394,394). With your back turned so

that you cannot see the number, ask A to

pass the sheet of paper to spectator B, who

is requested to divide the number by 7.

“Don’t worry about the remainder,” you

tell him, “because there won’t be any.” B

is surprised to discover that you are right

(e.g., 394,394 divided by 7 is 56,342).

Without telling you the result, he passes iton to spectator C, who is told to divide it by

7. Nikhil Sheth 8. Swaminathan V

9. K. M. Shanthi 10. Praveen Tiwari

11. Gurpreet Singh 12. Jagannathan P. S.

13. Sudhanshu Kalsotra 14. Sagar Bajal

15. R. Mythili 16. Mahesh Chand 17. Vikas

Rathi 18. Divakar Kumar 19. Abhay Kumar

20. Mehul Khatri 21. Mitsu Shah 22.

Shreya Gala

Puzzle No 158:

1. Prasham Rambhia 2. R. Krishnaswamy3. V. Parasurambabu 4. Praveen

Tiwari 5. Gurpreet Singh 6. Sonal

Khirwal 7. Jagannatham P.S. 8. Ashwin

Shrivastava 9. Sagar Bajaj 10. Vikas Rathi

11. Mitsu Shah

[email protected]

Kindly submit the answers

to the puzzle by 5th of every

month at :

[email protected]

S H I L P A ' S P U Z Z L E S

Krishnaswamy, R Ramakrishnan, R

Govindan, V Shinkar, N. K

Joshi, J.R. Sodhi, M.L.

Lakshmanan, N Cuddalore Samarao Laxmanrao

Mehta, S.R Thakore, C.R

Narasimhan, K.P Pandit, D.K

Many Happy Returns of the day the Actuary India wishes many more years of healthy life to the

following fellow members whose Birthday fall in October 2011

To lead people, walk beside

them … As for the best

leaders, the people do not

notice their existence. The next best, the people

honor and praise. The next,

the people fear; and the next,

the people hate … When the

best leader’s work is done

the people say, ‘

We did it ourselves !

- Lao-Tsu

Quotable Quotes

(Birthday greetings to fellow members who have attained 60 years of age)



RNI NO. - MAHENG/2009/28427

Published between 12 th - 16 th of every month

Postal Registration No. - MH/MR/South/297/2009-11

Posted between 17 th - 23rd of every month

actuary india oct 2011

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