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The Actuary The magazine of the Institute & Faculty of Actuaries
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Are we ready for this?

In March this year the European Parliament endorsed the proposal set out by its commissioners: that most listed EU companies prepare and publish their consolidated accounts by 2005 in accordance with a single set of standards. This requirement presents the global insurance industry with a problem, given that it currently employs a myriad of accounting standards, varying considerably across jurisdictions. Some companies have therefore adopted US GAAP (generally accepted accounting principles) as a default measure for international reporting.

New proposals
The International Accounting Standards (IAS) Committee has set up a steering committee to develop a unified standard for insurance consistent with its ‘conceptual framework definitions of assets and liabilities’. US GAAP does not currently meet this standard. The output from the steering committee is a draft statement of principles (DSOP) for insurance contracts, a thought-provoking and radical set of proposals, which broadly advocates accounting close to a ‘fair value’ approach. If adopted, the DSOP will fundamentally change the way that insurance businesses are run.
Many of the chapters of the DSOP have been made publicly available at www.iasb.org.uk, the IAS Board website. Some important areas, such as the treatment of performance-linked (with-profits and unit-linked) contracts, presentation, and disclosure, are still under debate and should be released later this year.
With the publication of most of the DSOP, the debate has now moved from discussions between a select few individuals into a bruising encounter in the public arena. Letters to the IAS Board from various bodies have been published in the financial press, some highly controversial and downright rejecting the DSOP, while others argue in broad support of the concepts outlined within the proposals, but also express concern over the implementation timetable.
One of the concerns that has been raised by many is how the qualitative characteristics within the IAS framework, such as the production of reliable and comparable information, can be met when there is no active market for insurance contracts on which to base fair value. Actuaries have an important role to play in addressing such problems.

Actuarial input
The steering committee encouraged the International Actuarial Association (IAA) to develop actuarial standards of practice that would provide further guidance with respect to the implementation of the DSOP. The IAA is the global professional organisation of actuarial associations and actuaries. One of its objectives is to represent member associations in discussion with international bodies. The Faculty and Institute of Actuaries are members: this means that all UK qualified actuaries are members of the IAA.
In Cancun in March this year, the IAA Council endorsed the establishment of a subcommittee of its Insurance Accounting Committee. The subcommittee has set up a drafting group of 11 members comprising three chairs, five drafters (of whom I am the UK representative), and three general insurance specialist peer reviewers. Our charge is to develop recommendations ‘regarding international accounting standards of practice for preparing or reviewing values or information relative to the IASB financial reporting standards for insurance contracts and also for certain financial instruments, provisions, contingent liabilities and contingent assets’.
These are challenging terms of reference. Not only is this the first time that such international actuarial standards are to be produced, but they are being developed in accordance with a set of accounting principles that have not yet been finalised. Further, they quite rightly capture the actuarial aspects of other accounting standards that are relevant to insurance companies’ accounts, such as financial instruments under IAS39 (for non-insurance contracts) and contingent liabilities under IAS37, and also other projects currently being undertaken by the IAS Board, such as the first-time application of international financial reporting standards, amendments to IAS39 and business combinations.
To meet this challenge, the subcommittee is adopting an open and accessible approach. It is currently publishing discussion papers on a number of issues identified in the DSOP. There are around 45 or so issues under consideration, and papers on most of these are already on the IAA website (www.actuaries.org). The issues being considered can be categorised as below and include, for example, the following important areas:
Next steps and your input
The aim is to obtain views on the discussion papers in time for the IAA meeting in Barcelona in October of this year. A preliminary exposure draft of the standards could then be drafted shortly afterwards, with possibly a six-month exposure period concurrent with the period in which the IAS Board’s insurance financial reporting exposure draft will be open for comments. After this, the process to develop the final exposure draft would begin.
Additionally, the main insurance committee has prepared comments on certain sections of the DSOP, and these comments are open to discussion on the IAA website. For the benefit of actuaries seeking further guidance, the IAA is also producing collections of educational materials, articles, and presentations.
We need your help and participation. Members can log on to the IAA website and take part in the discussion groups on the actuarial standards which can be found in one of two ways, both of which are shown in the link diagram below:
This is your chance to influence the development of the actuarial standards. You can respond in an individual capacity, on behalf of your company, or on behalf of one of the working parties considering the DSOP. Staff members of the IAS Board are interested observers of the work of the IAA, and your views can also be shared with them.
By providing comments, you can get your views known, and possibly influence the final accounting principles adopted for insurance contracts. By following the discussions and understanding the implications, you can also ensure that you are ready for the next stage of the insurance accounting revolution.

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