IASB Issues International Financial Reporting Standard For Insurance Contracts

IAA Will Develop International Actuarial Standards of Practice

The International Accounting Standards Board (IASB) issued International Financial Reporting Standard 4 Insurance Contracts (IFRS 4) on March 31, 2004 after seven years of study. The IASB is publishing IFRS 4 as three separate booklets. The first contains the mandatory requirements of the IFRS; the second contains the IASB's Basis for Conclusions, which sets out the IASB's reasoning behind the requirements in the IFRS; and the third consists of implementation guidance, including various illustrative examples. Subscribers are able to access the standard through IASB's online services. Those wishing to subscribe can do so via e-mail request or online.

The publication of this IFRS provides, for the first time, guidance on accounting for insurance contracts, and marks the first step in the IASB's project to achieve uniform insurance industry accounting practices around the world. Introducing IFRS 4, Sir David Tweedie, IASB chairman, said, "At the urging of users, insurers and regulators, we have developed IFRS 4 to provide interim guidance on insurance accounting practices without imposing on the insurance industry significant costs that could prove to be wasted when we complete the more comprehensive project." A global consensus on a rigorous and comprehensive approach to insurance accounting could not be completed in time to meet the starting date of 2005 set by the European Union and other jurisdictions. In that light, IFRS 4 does not require extensive changes that might need to be reversed when the IASB completes the second phase of its project. It introduces improved disclosures for insurance contracts and makes modest improvements in recognition and measurement practices.

In the second phase, the IASB will address broader conceptual and practical issues related to insurance accounting. These will be the subject of IASB deliberations and consultations with interested parties that will resume in the second quarter of 2004. The project may take several years to complete, and IFRS 4 is subject to change as a result of the working party's discussions. For a detailed list of the primary requirements of IFRS 4, visit the IASB web site.

IFRS 4 and future IASB standards are expected to generate considerable work for actuaries involved in the accounting for contracts offered by insurers.

These standards do not include detailed guidance to the actuary on how to actually perform the needed calculations or to assess the appropriateness of the measurement of the liability for these balance sheet obligations. The needed detailed guidance has been left to the actuarial profession to provide.

The International Actuarial Association (IAA) has undertaken to provide this guidance by developing International Actuarial Standards of Practice (IASPs). The IAA Professionalism Committee is responsible for monitoring the development process, which includes preparing the IASP for exposure and consulting, conducting additional consultations if needed, developing a final exposure draft for Council approval, and putting the final version to a membership vote. Once approved by full member associations, the IASP will become effective.

As noted, developing actuarial standards is a new process for the IAA. As a result, limited experience is currently available within the IAA for the format or the wording to be used. The subcommittee requested support from the Actuarial Standards Board (the "ASB"), the actuarial organization associated with the American Academy of Actuaries that adopts actuarial standards for the U.S. actuarial profession. This assistance should prove beneficial because of the ASB's long experience in developing actuarial standards in a highly litigious country. As a result, the ASB is acting as a staff resource to the subcommittee.

An IASP adopted by the IAA would not automatically be binding on actuarial associations in relation to their own standard-setting activities in connection with local practice, except in cases where a client advised by the actuary is required, or decides, to comply with the relevant IASP.

A Member Association can decide whether to (1) endorse a particular IASP for use in connection with, say, a relevant International Financial Reporting Standard, (2) adopt it formally for use in relation to local accounting standards or other reporting requirements, (3) adapt it to produce a locally applicable standard, or (4) do nothing. Where a Member Association decides to adopt a standard that would be applicable in the same or similar circumstances as would require compliance with an IASP or where an actuary might find himself or herself being required to comply with the IASP and the national standard simultaneously, the Member Association should ensure that its standard does not conflict with the IASP in regard to work which falls within the scope of the IASP. Unless a Member Association decides on course (3) above, the IAA IASP would apply to actuaries practicing in that country. The Member Association, not the IAA, is expected to deal with discipline matters with respect to the application of IASPs.

Currently, several IASPs related to IFRSs affecting insurers are under development. They will take one of two forms: 1) a class 3 IASP or "recommended practice;" or 2) a class 4 IASP or "practice guideline." The areas currently covered by the material being developed include actuarial practice, contract classification, embedded derivatives, reinsurance-related issues, liability adequacy tests, setting current best estimate assumptions, disclosures, stochastic models, business combinations (acquisitions and mergers), and unbundling (splitting investment from risk elements where practical).

The subcommittee aims to prepare various informal discussion drafts that will be available in the near future. The objective of these drafts is to provide an opportunity to receive comments before the promulgation of Preliminary Exposure Drafts, currently anticipated in early June. Preliminary Exposure Drafts only need approval by the IAA president in order to be distributed. It is hoped that these due process stages will lead to the receipt of comments and suggestions that will enable final IASP Exposure Drafts to be brought to the IAA Council at its Washington meeting (November 2004) for approval of their release for a final exposure period and vote by Member Associations.

Editor's Note: For more information, see the special newsletter on the Development of Potential IAA Standards for Application with IASB Standards. The newsletter has also been posted to the IAA Web Site in the Members' section under IAA Documents, Newsletters.