CAS Presents Fair Value Research to International Accounting Standards Board

LONDON— CAS members Ralph Blanchard, Bob Conger, and Sam Gutterman presented research on the fair value of claim liabilities to the International Accounting Standards Board (IASB) on February 15. Wayne Upton, IASB Director of Research, commented that the research, "Contributed significantly to the credibility of the actuarial profession in the eyes of the IASB."

In 2004, the CAS published Fair Value of P&C Liabilities: Practical Implications, a book of commissioned analyses by the Tillinghast business of Towers Perrin and PricewaterhouseCoopers LLP. The analyses show the impact of fair value concepts applied to property/casualty insurance companies. The CAS provided copies of the book to the IASB, but the IASB sought the opportunity for a live presentation and discussion.

The CAS presentation focused on the implications of moving from the current accounting practices for property/casualty insurance companies in countries like the United States and United Kingdom to a more economic-based system of accounting. One of the major changes to insurance company financial statements in such a move would be the reflection of the time value of money, or discounting, versus not reflecting the time value of money, which is the most common U.S. practice. The second major change involves introducing risk adjustments, to reflect the uncertainty in insurance claim liabilities. These changes would make the accounting more consistent with academic finance theory, but are considered controversial by some insurance regulators.

Blanchard, chair of the research project oversight team, opened the presentation by providing the overall context of the research and framing the issues at hand. Conger presented key results and implications from the Tillinghast research, while Gutterman presented insights and key results of the PricewaterhouseCoopers research. Blanchard concluded with a summary outlining the pros and cons of partial or full implementation of discounting and risk adjustment in the financial reporting of property/casualty claim liabilities.

"The presentation would not have been possible without the significant contributions of both Tillinghast and PricewaterhouseCoopers," said Blanchard. "Their extensive research and presentation at the IASB session involved contributions well beyond the stipend the CAS provided for the fair value research project, and the CAS is extremely grateful."