overview and activities related to accounting iais overview and activities related to accounting1...

IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 1GDNL Program – Module 25 (1)

16 May 2006

Dynamics in Accounting and Auditing Dynamics in Accounting and Auditing related to Insurance Supervision related to Insurance Supervision

Peter Cooke, Member of SecretariatInternational Association of Insurance Supervisors

16 May 2006


16 May 2006

Outline of PresentationOutline of Presentation

1. Introduction to IAIS and its working parties on accounting issues

2. Insurance Core Principles 3. IFRS from perspective of insurance

supervisors4. Insurance Contracts Phase I5. Insurance Contracts Phase II6. Supervisory Framework and roadmap for

solvency assessment


16 May 2006

International Association of Insurance SupervisorsInternational Association of Insurance Supervisors

IAIS objectives:• cooperate to contribute to improved supervision of

the insurance industry on a domestic and international level in order to maintain efficient, fair, safe and stable insurance markets and for the benefit and protection of policyholders

• promote development of well regulated insurance markets

• contribute to global stability


16 May 2006

IAIS Primary ActivitiesIAIS Primary Activities

• Develop international standards for insurance supervision

• Assist supervisors in implementation of standards• Promote cooperation between insurance

supervisors • Coordinate with other financial sector and

international organisations


16 May 2006

IAIS organisation chartIAIS organisation chart (as of April 2006)(as of April 2006)

Secretariat

ACCOUNTING SUBCOMMITTEE

Enhanced Disclosure Subcommittee

Financial Conglomerates Subcommittee

Solvency & Actuarial Issues Subcommittee

Insurance Fraud Subcommittee

Reinsurance and Other Forms of Risk Transfer Subcommittee

Reinsurance Transparency GroupINSURANCE CONTRACTS SUBCOMMITTEE

Executive Committee

General Meeting

Technical CommitteeImplementation Committee

Regional Coordination Subcommittee

Insurance Laws, Regulations, Practices & Standards Subcommittee

Task Force on Insurance Core Curriculum

Budget Committee

Financial Outlook Task Force

Pension Coordination Group


16 May 2006

IAIS working parties on accountingIAIS working parties on accounting

Insurance Contracts Subcommittee• IASB projects:

– Insurance Contracts (Phase II - valuation of insurance liabilities for general purpose accounting)

– Financial instruments– Revenue recognition– Chaired by Rob Esson (US)


16 May 2006

IAIS working parties on accountingIAIS working parties on accounting

Accounting Subcommittee• IASB projects not covered by Insurance Contracts

Subcommittee• Currently undertaking survey on impact of IFRS 4

implementation upon supervisors• Auditing• Liaison with other bodies, and any other

accounting-related issues• Chaired by Tomoko Amaya (Japan)


16 May 2006

IAIS Standard Setting ProcessIAIS Standard Setting Process

Core Principles

Core Principles

Principles

Supervisory Standards

Guidance & Issues Papers

Principles

Supervisory Standards

Guidance & Issues Papers

• Two tier approach


16 May 2006

Insurance Core PrinciplesInsurance Core Principles

Most relevant to Accounting:

• ICP 20: Liabilities• ICP 21: Investments• ICP 23: Capital adequacy & solvency• ICP 26: Information, disclosure & transparency

towards the market


16 May 2006

ICP 20: Liabilities

• The supervisory authority requires insurers to comply with standards for establishing adequate technical provisions and other liabilities, and making allowance for reinsurance recoverables.

• The supervisory authority has both the authority and the ability to assess the adequacy of the technical provisions and to require these provisions be increased, if necessary.

ICP 21: Investments

• The supervisory authority requires insurers to comply with standards on investment activities.

• These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management

Insurance Core PrinciplesInsurance Core Principles


16 May 2006

ICP 23: Capital adequacy & solvency

• The supervisory authority requires insurers to comply with the prescribed solvency regime.

• This regime includes capital adequacy requirements and requires suitable forms of capital that enable the insurer to absorb significant unforeseen losses

ICP 26: Information, disclosure & transparency towards the market

• The supervisory authority requires insurers to disclose relevant information on a timely basis in order to give stakeholders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed

Insurance Core Principles (cont)Insurance Core Principles (cont)


16 May 2006

IAIS input to IASBIAIS input to IASB

IAIS representation on IASB working groups:• Standards Advisory Council – member (Tomoko

Amaya)• Insurance Working Group – 2 seats as official

observer (Tomoko Amaya & Rob Esson)• Financial Instruments Working Group – official

observer (Rob Esson)Comment letters and papers


16 May 2006

IAIS views on IASB standardsIAIS views on IASB standards

• IAIS supports harmonised accounting principles• Consistent approach to measurement of assets

and liabilities is essential to meaningful disclosure• IAIS would prefer consistent methodologies for

regulatory and general-purpose financial reporting• IAIS is concerned about the possible mismatch in

accounting models in phase I of IFRS 4• IAIS members unanimously against the use of own

credit rating in measurement of liabilities


16 May 2006

IFRS 4 – IAIS survey on implementation

• Qualitative study by Accounting Subcommittee

• Impact on supervisors of implementation of IFRS 4

• Due for publication Q2 2006• Main themes from survey responses:

– Definition of an insurance contract– ‘Mismatch’ between assets and liabilities


16 May 2006

IFRS 4 – IAIS survey on implementation

• Main themes from survey responses (cont):– Catastrophe and equalisation provisions– Discretionary participation features– Impact of application of IAS 39


16 May 2006

First ‘Liabilities Paper’ issued May 2005:• Preferable if the methodologies for financial and

regulatory reporting are substantially consistent• Inappropriate for prudential regulatory purposes to

require total financial resources (net liability plus equity) backing an insurance contract at less than its current surrender value

• Allowing for own credit worthiness is inconsistent with the valuation of insurance liabilities in a going concern and unacceptable for both regulatory and general purpose financial reporting

Insurance Contracts Phase IIInsurance Contracts Phase II


16 May 2006

First ‘Liabilities Paper’ (cont):• Asset / Liability measurement consistency is

especially important in the insurance sector

• A bottom up approach is preferable but profit should only be recognised where an appropriate and sufficiently reliable risk margin has been provided for in the value of liabilities

• Risk free discount rate utilising the entire yield curve is appropriate, except where the benefits are contractually dependent upon the performance of the underlying assets. For prudential purposes, expected earning rate should be verified against the discount rate



16 May 2006

Second ‘Liabilities Paper’ – draft under consultation, expected to be issued end May 2006.

Key principles and observations:• Measurement of an insurance liability should be based

upon the future cash flows relating to full settlement with the claimant/beneficiary

• The IAIS supports an approach to modelling whereby observable market inputs are used to the fullest extent possible, and the remaining elements are modelled.

• A common framework is appropriate to model non-observable inputs as objectively as possible.

• Where the amount or timing of future cash flows in uncertain, probability is a crucial factor in measuring the cash flows relating to the contract.



16 May 2006

• An exit model is preferable but profit on inception should be recognised only where an appropriate and sufficiently reliable risk margin in the liability measurement.

• Similar obligations with similar risk profiles should redult in similar liabilities.

• Any methodology for calculating the margin should share certain characteristics.

• The margin should determined in such a way as to promote transparency and comparability between different insurers in an objective manner.

• Probabilities which reflect policyholder behaviour regarding the contracts as a whole are needed to achieve meaningful results.

• No requirement for application of surrender value floor to insurance liabilities for general purpose accounting.

IASB Insurance Contracts Project - Phase IIIASB Insurance Contracts Project - Phase II


16 May 2006

• Future cash inflows should be taken into account in the measurement, if integral to the obligations under the contract.

• Cash inflows should be offset against outflows• The IAIS would prefer full expensing of acquisition costs

at inception with allowance for the future income to recover the costs taken into the measurement.

• Discretionary benefits should be treated as liabilities based upon expected future cash flows, as treatment as equity would misrepresentthe financial position.

• Derivatives embedded in insurance contracts should be taken into account in the valuation methodology.

• The credit standing of an insurer is not relevant to the valuation of insurance liabilities.



16 May 2006

IAIS IAIS Framework for Insurance SupervisionFramework for Insurance Supervision

A new framework for insurance supervision:

Towards a common structure and common standards for the assessment of insurer solvency (Framework paper)


16 May 2006

IAIS Framework for Insurance SupervisionIAIS Framework for Insurance Supervision

financial governance market conduct

supervisory assessment and intervention

Preconditions

Regulatory requirements

Supervisory actionLEVEL 3

LEVEL 2

LEVEL 1 the insurance sector and insurance supervision

basic conditions for the effective functioning of

the insurance supervisory authority


16 May 2006

IAIS IAIS Common structure for solvency assessmentCommon structure for solvency assessment

‘Cornerstones Paper’ • Sets out key ‘cornerstones’ for regulatory

financial requirements of supervisory framework (October 2005)

‘Roadmap Paper’• Workplan for the IAIS Solvency project (February

2006)

‘Structure Paper’ (in progress)• Outlines a more detailed philosophy on

assessment of insurer solvency, and analysis of main aspects and elements


16 May 2006

International Association of Insurance SupervisorsInternational Association of Insurance Supervisors

Sources of Information1. Website www.iaisweb.org2. Newsletter (quarterly)3. IAIS published papers 4. Working party meetings5. IAIS annual conference6. Training seminars7. Contact IAIS [email protected]


16 May 2006

Title IAIS papers

Framework paper

A new framework for insurance supervision: Towards a common structure and common standards for the assessment of insurance solvency (2005)

Cornerstones paper

Towards a common structure and common standards for the assessment of insurer solvency: cornerstones for the formulation of regulatory financial requirements (2005)

Roadmap paper

Roadmap for a common structure and common standards for the assessment of insurer solvency (2006)

Principles Insurance core principles and methodology (2003)

Comment paper

Issues arising as a result of the IASB’s Insurance Contracts Project – Phase II: Initial IAIS Observations (2005)

Forthcoming papers

Issues arising as a result of the IASB’s Insurance Contracts Project – Phase II: Second set of IAIS Observations (Draft – expected end May 2006)

The IAIS common structure for the assessment of insurer solvency (Draft – expected October 2006)

IAIS papers most relevant to accounting and financial IAIS papers most relevant to accounting and financial assessmentassessment


16 May 2006

IAIS Standard Setting ActivitiesIAIS Standard Setting Activities

Questions???

Thank you!!

[email protected]

overview and activities related to accounting iais overview and activities related to accounting1...

Documents

regulated insurance

insurance industry

stable insurance markets

working parties

international level

disclosure transparency

adequate technical provisions

financial sector