Casualty Actuarial Society

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Fair Value of P&C Liabilities: Practical Implications

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Contents

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Cover and Table of Contents

Introduction

How Might the Presentation of Liabilities at Fair Value Have Affected
the Reported Results of U.S. Property and Casualty Insurers?

  1. Executive Summary
    Research Approach
    Impact of Fair Value on Financial Results
    Conclusions and Implications
      Reliability
      Relevance
      Cost

  2. Introduction
    2.1 Goals of the Paper
    2.2 Who We Are
    2.3 Funding for the Study
    2.4 Roadmap to the Paper

  3. Background
    3.1 Definition of Fair Value
    3.2 Fair Value in a Property and Casualty Insurance Context
    3.3 Estimating the Fair Value of Policy Benefit Liabilities
    3.4 Status of IASB and FASB Deliberations
      Financial Accounting Standards Board
      International Accounting Standards Board
    3.5 Considerations in Evaluating the Fair Value Proposal
      Reliability of the Measure
      Relevance to Users
      Comparability and Consistency of the Measure

  4. Scope of Inquiry
    4.1 Limitations on Scope of Analysis
    4.2 Data Limitations

  5. Research Approach
    5.1 Overview
    5.2 Published Regulatory Financial Data
    5.3 Adjustments to Convert Data to Current U.S. GAAP
    5.4 Discounting for the Time Value of Money
      Development of Payment Pattern Assumptions to Project the Future Cash Flows
      Selecting an Interest Rate for Discounting
      Applying the Discount Rates to the Projected Cash Flows
    5.5 Market Risk Margins
      Issues Relating to the Definition and Measurement of Risk
      Overview of Our Approach to Measuring Market Risk Margins
      Empirical Market Pricing Risk Margins
      Measuring Reserving Risk and Deriving Market Reserve Risk Margins

  6. Impact of Fair Value on Financial Results
    6.1 Balance Sheet Impact
    6.2 Income Statement Impact

  7. Conclusions and Implications
      Reliability
      Relevance
      Cost

  8. Technical Appendix
    8.1 Developing the Financial Data
      Published Regulatory Financial Data
      Adjustments to Convert Data to U.S. GAAP
    8.2 Time Value of Money Adjustment
      Schedule P
      Step 1 — Projecting the Future Cash Flows
      Step 2 — Selecting an Interest Rate
      Step 3 — Applying the Discount Rates
    8.3 Market Risk Margin Adjustment
      Step 1 — Pricing Risk Margin
      Step 2 — Pricing Volatility
      Step 3 — Reserve Volatility
      Step 4 — Reserve Market Risk Margins
    8.4 Bibliography
      Research Papers
      Accounting Standards
      Public Data Referenced

An Investigation of Practical Matters Related to Implementing
Fair Value Accounting for Property/Casualty Loss Reserves

    Background
    Scope & Objectives
    Executive Summary
      Findings
        Discounting Methods
        MVM Methods
        Balance Sheet (Loss Reserves)
        Income Statement (Incurred Losses)
      Significant Issues
        Discounting and MVM Modeling Issues
        MVM Estimation Issues
        Financial Statement Presentation Issues

    Data
      Interest Rates
      Loss Data
      Experience Period
      Companies & Lines of Business

    Methodology
      Discounting
      MVM Methods
        Return on Capital (ROC) Method
        Development Method (DM)
        Stochastic Simulation (SS) Models
      MVM Model Calibration

    Analysis
      Discounting
      Personal Auto Liability
        Indicated Market Value Margins
        Indicated Fair Value Factors
        Impact on Calendar Year Incurred Losses
        Impact by Accident Year
      Workers' Compensation
        Indicated Market Value Margins
        Fair Value Factors
        Impact on Calendar Year Incurred Losses
        Impact by Accident Year
      Medical Malpractice (Claims-Made)
        Fair Value Factors
        Calendar Year Incurred Loss (CYIL) Impacts
        Impact by Accident Year
      References

    Appendix
      Company Size Criteria
      Interest Rates
      Return on Capital Model
      Development Model
      Stochastic Simulation Method
      Model Calibration
      Definitions/Abbreviations

Casualty Actuarial Society Request for Proposals:
Research Project on Practical Implications of Fair Value of P&C Liabilities


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