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Actuaries Abroad
Mickey, Paris, and the IASB
by Kendra M. Felisky-Watson
In October actuaries across the U.K. packed up their mouse ears for the annual gathering of gen-eral insurance actuaries held at Disneyland Paris. While a convention in France for U.K. actuaries probably appears a little unusual, for most it is really only a quick hop on the Eurostar through the Channel tunnel.
In order to keep the actuaries from sneaking out to enjoy the attractions at the park, a plethora of interesting speakers were lined up, including the presidents of the Faculty and Institute of Actuaries, the risk manager of Disneyland Paris, the chief actuary of AXA, the chief executive of the Institute of Risk Management, and the CAS's own Bob Conger. Topics of general sessions included fair value accounting; operational risk; risk management; and the pricing, management, and control of extreme events. More than 40 different workshop sessions throughout the three-day conference were also held on such subjects as financial condition reporting, stochastic claims reserving, and asbestos in Europe.
While the hotel bar provided its usual obvious attraction on the social side, on the last evening delegates were allowed access to the closed park where three main attractions were opened for our exclusive use. I am sure that a few actuaries were spotted with their calculators madly extrapolating the maximum velocities on Space Mountain. The rest of us enjoyed the lack of lines for these rides and the opportunity for pictures with the Disney characters.
Details of the conference along with copies of all the papers can be found on the Institute's Web site in the General Insurance section.
Fair Value Accounting
Stop! Don't let your eyes glaze over at the word "accounting!" This is important!
Currently there is no International Accounting Standard for insurance contracts and in the absence of such a standard insurance, companies revert to local GAAP. However, the International Accounting Standards Board (IASB) has put in place a project to develop a standard for insurance companies. Some of the key drivers behind this decision are:
- Increased globalization of the insurance industry;
- Breakdown of traditional operating areas between different financial service providers; and
- Need for greater consistency of regulatory supervision both across different territories and across the financial services industry.
A fundamental change for U.K. insurers and reinsurers is the recognition of assets and liabilities that replaces the deferral and matching approach used under U.K. GAAP. Insurers will need to estimate the total outstanding liability for all future losses based on a closed book of contracts, which is akin to an underwriting year valuation approach. Unearned premium reserves and deferred acquisition expenses will no longer be recognized. Expenses will be accounted for as they are incurred.
However, the area that actuaries are particularly concerned with has to do with "fair value." Insurance company assets and liabilities will be required to be held at fair value using the definition of fair value as "the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction" or "the amount that the enterprise would have to pay a third party at the balance sheet date to take over the liability." In other words, fair value is similar to market value. The problem is that there is not a liquid secondary market for insurance transactions so the determination of the fair value of liabilities such as reserves will be quite difficult. The concept of fair value for insurance contracts was intended to be consistent with the accounting principles for other sectors of the financial services industry.
There is a long way to go before a consensus on practical ways to implement means to establish market value or risk margin will be reached. Unfortunately, general insurance actuaries are a bit further behind the life actuaries in realizing that these proposals could have quite an impact on insurance company accounts.
At the moment the implementation of the current IASB proposals will not occur until 2005 or later. However, there is quite a lot of work to do in order to see the impact of these proposals on the insurance industry and, in particular, to make sure that the concept of fair or market value is implemented consistently.
Although U.S. GAAP is not planning any changes as a result of these proposals, U.S. GAAP is being reviewed, because of all the latest accounting scandals. It is entirely foreseeable that there will be some movement towards the international accounting standards.