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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?

List of Exhibits

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