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IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 1GDNL Program – Module 25 (1)
16 May 2006
Dynamics in Accounting and Auditing Dynamics in Accounting and Auditing related to Insurance Supervision related to Insurance Supervision
Peter Cooke, Member of SecretariatInternational Association of Insurance Supervisors
16 May 2006
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 2GDNL Program – Module 25 (1)
16 May 2006
Outline of PresentationOutline of Presentation
1. Introduction to IAIS and its working parties on accounting issues
2. Insurance Core Principles 3. IFRS from perspective of insurance
supervisors4. Insurance Contracts Phase I5. Insurance Contracts Phase II6. Supervisory Framework and roadmap for
solvency assessment
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 3GDNL Program – Module 25 (1)
16 May 2006
International Association of Insurance SupervisorsInternational Association of Insurance Supervisors
IAIS objectives:• cooperate to contribute to improved supervision of
the insurance industry on a domestic and international level in order to maintain efficient, fair, safe and stable insurance markets and for the benefit and protection of policyholders
• promote development of well regulated insurance markets
• contribute to global stability
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 4GDNL Program – Module 25 (1)
16 May 2006
IAIS Primary ActivitiesIAIS Primary Activities
• Develop international standards for insurance supervision
• Assist supervisors in implementation of standards• Promote cooperation between insurance
supervisors • Coordinate with other financial sector and
international organisations
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 5GDNL Program – Module 25 (1)
16 May 2006
IAIS organisation chartIAIS organisation chart (as of April 2006)(as of April 2006)
Secretariat
ACCOUNTING SUBCOMMITTEE
Enhanced Disclosure Subcommittee
Financial Conglomerates Subcommittee
Solvency & Actuarial Issues Subcommittee
Insurance Fraud Subcommittee
Reinsurance and Other Forms of Risk Transfer Subcommittee
Reinsurance Transparency GroupINSURANCE CONTRACTS SUBCOMMITTEE
Executive Committee
General Meeting
Technical CommitteeImplementation Committee
Regional Coordination Subcommittee
Insurance Laws, Regulations, Practices & Standards Subcommittee
Task Force on Insurance Core Curriculum
Budget Committee
Financial Outlook Task Force
Pension Coordination Group
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 6GDNL Program – Module 25 (1)
16 May 2006
IAIS working parties on accountingIAIS working parties on accounting
Insurance Contracts Subcommittee• IASB projects:
– Insurance Contracts (Phase II - valuation of insurance liabilities for general purpose accounting)
– Financial instruments– Revenue recognition– Chaired by Rob Esson (US)
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 7GDNL Program – Module 25 (1)
16 May 2006
IAIS working parties on accountingIAIS working parties on accounting
Accounting Subcommittee• IASB projects not covered by Insurance Contracts
Subcommittee• Currently undertaking survey on impact of IFRS 4
implementation upon supervisors• Auditing• Liaison with other bodies, and any other
accounting-related issues• Chaired by Tomoko Amaya (Japan)
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 8GDNL Program – Module 25 (1)
16 May 2006
IAIS Standard Setting ProcessIAIS Standard Setting Process
Core Principles
Core Principles
Principles
Supervisory Standards
Guidance & Issues Papers
Principles
Supervisory Standards
Guidance & Issues Papers
• Two tier approach
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 9GDNL Program – Module 25 (1)
16 May 2006
Insurance Core PrinciplesInsurance Core Principles
Most relevant to Accounting:
• ICP 20: Liabilities• ICP 21: Investments• ICP 23: Capital adequacy & solvency• ICP 26: Information, disclosure & transparency
towards the market
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 10GDNL Program – Module 25 (1)
16 May 2006
ICP 20: Liabilities
• The supervisory authority requires insurers to comply with standards for establishing adequate technical provisions and other liabilities, and making allowance for reinsurance recoverables.
• The supervisory authority has both the authority and the ability to assess the adequacy of the technical provisions and to require these provisions be increased, if necessary.
ICP 21: Investments
• The supervisory authority requires insurers to comply with standards on investment activities.
• These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management
Insurance Core PrinciplesInsurance Core Principles
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 11GDNL Program – Module 25 (1)
16 May 2006
ICP 23: Capital adequacy & solvency
• The supervisory authority requires insurers to comply with the prescribed solvency regime.
• This regime includes capital adequacy requirements and requires suitable forms of capital that enable the insurer to absorb significant unforeseen losses
ICP 26: Information, disclosure & transparency towards the market
• The supervisory authority requires insurers to disclose relevant information on a timely basis in order to give stakeholders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed
Insurance Core Principles (cont)Insurance Core Principles (cont)
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 12GDNL Program – Module 25 (1)
16 May 2006
IAIS input to IASBIAIS input to IASB
IAIS representation on IASB working groups:• Standards Advisory Council – member (Tomoko
Amaya)• Insurance Working Group – 2 seats as official
observer (Tomoko Amaya & Rob Esson)• Financial Instruments Working Group – official
observer (Rob Esson)Comment letters and papers
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 13GDNL Program – Module 25 (1)
16 May 2006
IAIS views on IASB standardsIAIS views on IASB standards
• IAIS supports harmonised accounting principles• Consistent approach to measurement of assets
and liabilities is essential to meaningful disclosure• IAIS would prefer consistent methodologies for
regulatory and general-purpose financial reporting• IAIS is concerned about the possible mismatch in
accounting models in phase I of IFRS 4• IAIS members unanimously against the use of own
credit rating in measurement of liabilities
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 14GDNL Program – Module 25 (1)
16 May 2006
IFRS 4 – IAIS survey on implementation
• Qualitative study by Accounting Subcommittee
• Impact on supervisors of implementation of IFRS 4
• Due for publication Q2 2006• Main themes from survey responses:
– Definition of an insurance contract– ‘Mismatch’ between assets and liabilities
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 15GDNL Program – Module 25 (1)
16 May 2006
IFRS 4 – IAIS survey on implementation
• Main themes from survey responses (cont):– Catastrophe and equalisation provisions– Discretionary participation features– Impact of application of IAS 39
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 16GDNL Program – Module 25 (1)
16 May 2006
First ‘Liabilities Paper’ issued May 2005:• Preferable if the methodologies for financial and
regulatory reporting are substantially consistent• Inappropriate for prudential regulatory purposes to
require total financial resources (net liability plus equity) backing an insurance contract at less than its current surrender value
• Allowing for own credit worthiness is inconsistent with the valuation of insurance liabilities in a going concern and unacceptable for both regulatory and general purpose financial reporting
Insurance Contracts Phase IIInsurance Contracts Phase II
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 17GDNL Program – Module 25 (1)
16 May 2006
First ‘Liabilities Paper’ (cont):• Asset / Liability measurement consistency is
especially important in the insurance sector
• A bottom up approach is preferable but profit should only be recognised where an appropriate and sufficiently reliable risk margin has been provided for in the value of liabilities
• Risk free discount rate utilising the entire yield curve is appropriate, except where the benefits are contractually dependent upon the performance of the underlying assets. For prudential purposes, expected earning rate should be verified against the discount rate
Insurance Contracts Phase IIInsurance Contracts Phase II
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 18GDNL Program – Module 25 (1)
16 May 2006
Second ‘Liabilities Paper’ – draft under consultation, expected to be issued end May 2006.
Key principles and observations:• Measurement of an insurance liability should be based
upon the future cash flows relating to full settlement with the claimant/beneficiary
• The IAIS supports an approach to modelling whereby observable market inputs are used to the fullest extent possible, and the remaining elements are modelled.
• A common framework is appropriate to model non-observable inputs as objectively as possible.
• Where the amount or timing of future cash flows in uncertain, probability is a crucial factor in measuring the cash flows relating to the contract.
Insurance Contracts Phase IIInsurance Contracts Phase II
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 19GDNL Program – Module 25 (1)
16 May 2006
• An exit model is preferable but profit on inception should be recognised only where an appropriate and sufficiently reliable risk margin in the liability measurement.
• Similar obligations with similar risk profiles should redult in similar liabilities.
• Any methodology for calculating the margin should share certain characteristics.
• The margin should determined in such a way as to promote transparency and comparability between different insurers in an objective manner.
• Probabilities which reflect policyholder behaviour regarding the contracts as a whole are needed to achieve meaningful results.
• No requirement for application of surrender value floor to insurance liabilities for general purpose accounting.
IASB Insurance Contracts Project - Phase IIIASB Insurance Contracts Project - Phase II
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 20GDNL Program – Module 25 (1)
16 May 2006
• Future cash inflows should be taken into account in the measurement, if integral to the obligations under the contract.
• Cash inflows should be offset against outflows• The IAIS would prefer full expensing of acquisition costs
at inception with allowance for the future income to recover the costs taken into the measurement.
• Discretionary benefits should be treated as liabilities based upon expected future cash flows, as treatment as equity would misrepresentthe financial position.
• Derivatives embedded in insurance contracts should be taken into account in the valuation methodology.
• The credit standing of an insurer is not relevant to the valuation of insurance liabilities.
Insurance Contracts Phase IIInsurance Contracts Phase II
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 21GDNL Program – Module 25 (1)
16 May 2006
IAIS IAIS Framework for Insurance SupervisionFramework for Insurance Supervision
A new framework for insurance supervision:
Towards a common structure and common standards for the assessment of insurer solvency (Framework paper)
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 22GDNL Program – Module 25 (1)
16 May 2006
IAIS Framework for Insurance SupervisionIAIS Framework for Insurance Supervision
financial governance market conduct
supervisory assessment and intervention
Preconditions
Regulatory requirements
Supervisory actionLEVEL 3
LEVEL 2
LEVEL 1 the insurance sector and insurance supervision
basic conditions for the effective functioning of
the insurance supervisory authority
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 23GDNL Program – Module 25 (1)
16 May 2006
IAIS IAIS Common structure for solvency assessmentCommon structure for solvency assessment
‘Cornerstones Paper’ • Sets out key ‘cornerstones’ for regulatory
financial requirements of supervisory framework (October 2005)
‘Roadmap Paper’• Workplan for the IAIS Solvency project (February
2006)
‘Structure Paper’ (in progress)• Outlines a more detailed philosophy on
assessment of insurer solvency, and analysis of main aspects and elements
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 24GDNL Program – Module 25 (1)
16 May 2006
International Association of Insurance SupervisorsInternational Association of Insurance Supervisors
Sources of Information1. Website www.iaisweb.org2. Newsletter (quarterly)3. IAIS published papers 4. Working party meetings5. IAIS annual conference6. Training seminars7. Contact IAIS iais@bis.org
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 25GDNL Program – Module 25 (1)
16 May 2006
Title IAIS papers
Framework paper
A new framework for insurance supervision: Towards a common structure and common standards for the assessment of insurance solvency (2005)
Cornerstones paper
Towards a common structure and common standards for the assessment of insurer solvency: cornerstones for the formulation of regulatory financial requirements (2005)
Roadmap paper
Roadmap for a common structure and common standards for the assessment of insurer solvency (2006)
Principles Insurance core principles and methodology (2003)
Comment paper
Issues arising as a result of the IASB’s Insurance Contracts Project – Phase II: Initial IAIS Observations (2005)
Forthcoming papers
Issues arising as a result of the IASB’s Insurance Contracts Project – Phase II: Second set of IAIS Observations (Draft – expected end May 2006)
The IAIS common structure for the assessment of insurer solvency (Draft – expected October 2006)
IAIS papers most relevant to accounting and financial IAIS papers most relevant to accounting and financial assessmentassessment
IAIS Overview and Activities related to Accounting Overview and Activities related to Accounting 26GDNL Program – Module 25 (1)
16 May 2006
IAIS Standard Setting ActivitiesIAIS Standard Setting Activities
Questions???
Thank you!!
peter.cooke@bis.org
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