International Happenings: The IAA
Ralph S. Blanchard,
CAS Representative to the IAA Insurance Accounting Committee
The following is a brief update on international issues of interest to CAS members, specifically those related to the International Actuarial Association (IAA).
What is the IAA, and how does it affect me?
The IAA has been around in its current form since 1998, but previously existed in other forms for decades. Before 1998, it was an association of individuals, but it is now an association of 44 associations from around the world. Members of the IAA include the Casualty Actuarial Society, the Society of Actuaries, the American Academy of Actuaries, the Institute of Actuaries of Australia, the Canadian Institute of Actuaries, and Het Actuarieel Genootschap (Netherlands). All members of these organizations are also members of the IAA. If you are an ACAS, FCAS, MAAA, FSA, or ASA, you are also a member of the IAA.
But why care about the IAA if you currently practice in the U.S. and have no plans to do otherwise? There are several reasons, including:
- Minimum educational standards for IAA member associations
- Mutual recognition discussions taking place between IAA members
- International standards of actuarial practice
- Trend toward global standards for financial services regulation
- Trend toward global consistency in accounting rules
While the above list may be in the order of greatest to least interest for some, the issues are best explained by going in reverse order.
Trend Toward Global Consistency in Accounting Rules
For a global economy to work, at least in the financial markets, an investor in one country has to be able to evaluate potential investments in another country. This requires consistent financial reports and financial reporting rules to reduce the "learning curve" required to understand potential foreign investments. In the past, this was accomplished to some extent by requiring foreign companies selling securities in a foreign exchange to file financial reports under more universally accepted accounting rules, such as U.S. GAAP or GAAP rules set by the International Accounting Standards Committee (IASC). But many foreign companies rebelled at the concept of filing financial reports under another country's accounting rules, and the IASC rules were not felt to be complete and comprehensive enough to serve the purpose of global financial markets.
In response, the IASC undertook a long-term project to upgrade their accounting standards. This project relied heavily on volunteer efforts, and this is where the IAA made its mark. The IAA in several instances produced major contributions to the new standards, such that the IAA began to be sought out for its advice. When the IASC reorganized earlier this year to a more staff-driven structure with less reliance on outside volunteers, a "standards advisory council" was set up to provide guidance and advice relative to the IASC's standards work. The only insurance organization given a representative on the standards advisory council was the IAA.
The IAA's IASB Committee now coordinates work in this area. (The IASC became the IASB after their reorganization.) Current projects include responding to the fair value accounting proposals for nearly all financial instruments (excluding insurance contracts) and a new insurance accounting standard being developed for possible 2005 implementation. Key issues with the new insurance standard are the discounting of all insurance reserves (property/casualty and life) and the potential for FASB to use this new standard as a template for a new U.S. GAAP insurance standard.
I currently am the CAS representative to the IAA's IASB Committee. Our October meeting in Hong Kong included discussion of both proposals and our response to those proposals.
Trend Toward Global Standards for Financial Services Regulation
Global financial markets depend on a stable financial system in the participating countries and the ability to move funds across borders. To this end, banking regulators have created international banking regulatory standards for internationally significant banks. Longer term the intent is to develop standards applicable to all banks in the participating countries.
The financial system of a country, however, includes brokerage firms and insurance companies, not just banks. Banks, brokers, and insurers can offer substantially similar products, so the financial regulatory system must address all three systems to be effective. Therefore, efforts to standardize financial regulation of banks across borders have been extended to brokers and insurers.
The International Association of Insurance Supervisors (IAIS) was created in 1994 to standardize insurance regulation across borders, among other charges. The IAIS is also a member of the Joint Forum, with its banking and brokerage counterparts. The Joint Forum is working towards eliminating potential opportunities for accounting arbitrage in the world financial markets. The IAIS work is generally in its infancy, and new regulatory guidelines and "model" regulatory standards need to be created. Research must be done on issues and alternatives. This is where the IAA can (and does) play a role. Without effective involvement from insurance experts, those from the banking side will dominate such discussions, given their head start in developing international regulatory standards for banks.
The Insurance Regulation Committee of the IAA has been providing research support and commentary on draft regulatory standards and issues raised by the IAIS. In the past year, it has produced at least three comment papers on such issues as the Basel Committee's proposed bank capital standards, the IAIS's insurance company disclosure guidelines, and the IAIS's paper dealing with capital adequacy. The IAA will also complete a white paper soon that describes insurer risks and capital needs.
International Standards of Actuarial Practice
The IAA is also stressing in its work the value that actuaries bring to the financial reporting (reserving) and the risk management/solvency process. This has raised the issue of whether international standards of actuarial practice should be developed, to match international accounting and regulatory standards. The IAA currently plans to develop such standards, and several IAA committees are now involved, including the IAA-IASB committee and the IAA-Insurance Regulation committee.
Mutual Recognition Discussions
IAA activity extends beyond the strictly technical issues. For example, the IAA Professionalism Committee listed the following items on its October meeting agenda: cross-border practice and mutual recognition, mutual discipline agreements, and international actuarial standards. The Professionalism Committee's meetings often bring together representatives from various countries' actuarial organizationsthe same people who would sit down with the CAS to discuss these issues outside the IAA framework.
Minimum Educational Standards for IAA Member Associations
As the IAA's role in accounting and regulation issues grows, membership in the IAA may become more important. To ensure that IAA membership means something, the IAA wants to better define (and perhaps strengthen) its membership requirements. Under the current IAA structure as an association of associations, this means codifying and strengthening the minimum standards for member associations.
In one phase of this process, the IAA's Education Committee will attempt to develop minimum syllabus requirements, and they hope to have these in effect around 2005. Mary Frances Miller is the current CAS representative on this committee. While the CAS will have no problem meeting any minimum requirements, the requirements may affect the CAS syllabus and exam structure around (or possibly before) 2005.
So, Tell Me Again Why All This Is Important?
The IAA has the potential to influence significantly the accounting and regulatory rules under which actuaries in many countries will have to live. It is doubtful that the U.S. can remain unaffected by these rule-making initiatives.
It is imperative that CAS members play an active role in these developments. My experience tells me that, in the absence of CAS input, many IAA work products risk reflecting a bias toward long-duration life policies, where public data is plentiful and insurance risk is minimal. As the largest body of property/casualty actuaries in the world, the CAS provides expertise and resources to the IAA efforts that may not be available elsewhere. While there are actuaries outside the U.S. who understand (and can communicate) many of the perspectives and issues we care about, they are not as numerous and may not always be heard.
The IAA also is developing professional education and practice standards that may find their way to our borders. We may not be able to control the creation of international professional guidelines. (They may be imposed, for example, in reciprocity agreements attached to free-trade initiatives.) Therefore, it is imperative that the CAS stay involved in the process and help shape the results, or externally-developed results might be forced on us that do not even address the issues we face.
What can I do to help?
You can notify the CAS Vice President-International, LeRoy Boison, that you want to help. We need people to review draft proposals and peer review our draft responses. The only requirement is your commitment to review documents thoroughly, as some of the IAA draft white papers and responses have totaled up to 100 pages. Proficiency in a foreign language is not required, because all IAA business is communicated in English. If you might like to help, please let us know!