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The Actuary The magazine of the Institute & Faculty of Actuaries

Copenhage– and beyond

The Danish Actuarial Society marked its centenary year by hosting the 14th Colloquium of the Groupe Consultatif in Copenhagen on 1 June. Representatives of 26 national actuarial associations were represented by almost 200 actuaries. Delegates heard presentations from academics, regulators, consultants, and practitioners with UK, French, and Danish backgrounds on topics related to the ‘fair valuation’ (FV) of insurance assets and liabilities.

After the formal introductions and welcome, Peter Clark of the International Accounting Standards Board (IASB) gave an update on developments at the board. These were mainly around the transformation to a full-time standard-setting body, and comments on the extent of recognition from various interested parties (ranging from full recognition from the EU, some enthusiasm from the International Organization of Securities Commissions (IOSCO) and the Basel Committee, through to growing acknowledgement from the US Securities and Exchange Commission (SEC) and Canadian Securities Administration).
Some of the key and most controversial accounting issues to be resolved are around:
– the treatment of future renewals as assets;
– whether entity-specific values can be used when market values are not available;
– should a company’s own credit rating affect the reported value of its liabilities?
Peter went on to draw parallels between some banking and fund management assets and liabilities and insurance assets and liabilities, in order to spell out the need for a new standard to ensure future consistency of profit reporting across the financial sector.
Finally, a tentative timetable for the development and implementation of the new international accounting standard was given as shown below.
Draft statement of principles autumn 2001
Field testing 2002
Exposure draft 2002
Final IAS 2003
Implementatio– 2005 (as required by EU legislation)
In traditional eurosceptical style, UK life companies are not at the forefront of driving and shaping the new standard. At present the running is being made by individual companies in Germany and the Netherlands.

Fair value
Second up was Andrew Cairns from the Department of Actuarial Mathematics and Statistics at Heriot-Watt University in Edinburgh.
Andrew worked through two approaches to finding the fair value of a particular stream of cashflows. He demonstrated the consistency of an approach based on mathematical economics with one based on financial mathematics using a portfolio of derivatives with the same pay-off as the cashflows to be valued. The conclusion was that the financial mathematics approach gives answers acceptable to the ‘fair value’ philosophy.
The centenary of Den danske Aktuarforening found the Danes in confident mood that their new standard for reporting takes important steps towards fair value reporting. It has to be said that the approach is not perhaps as ground-breaking as the latest IASB proposals, in that the key proposals seem at first sight to be close to a net premium valuation approach, using the premium basis and recognising renewal expenses but not incorporating lapses.

Reluctant participant
As the other EU nation traditionally seen as a reluctant participant, Denmark has a new approach which is not compliant with the 3rd Life Directive. It is also unlikely to be compliant with the latest IAS proposals, which raises the question ,‘Are the Danes going to have to go through the pain of changing their insurance accounting just in time for the new IAS to become effective and they find they have to change all over again?’.

Interesting issues
Peter Wright, chairman of the Accounting Liaison Group, followed the first Danish speaker and covered a mixed bag of interesting issues: financial instruments, related accounting issues, and general insurance.
In the first of this trio, Peter discussed the findings of the Financial Instruments Joint Working Group of standard setters (JWG). He noted that insurance liabilities were excluded from the remit of the JWG, but remarked that
strong support for fair values in the JWG paper has clear implications for the eventual IAS on insurance policyholder liabilities.
He went on to discuss the JWG proposals under the headings of scope, measurement, balance sheet and income statement presentation, disclosure, and hedge accounting.
In the related accounting issues section Peter looked at the current standards covering deferred tax and investment property. He then covered some general business provisioning topics.

French market
The final presentation was made by three actuaries from the French Insurance Supervisory Authority. They gave some background on the French life assurance market and tax rules that shape it, and went on to consider how to value embedded options in insurance contracts. They considered stochastic modelling and dynamic hedging but, unfortunately, not state price deflators.

Barcelona 2002
Chairman Peter Clark closed the colloquium looking forward to the 2002 Colloquium in Barcelona, provisionally entitled ‘Risk management and capital needs’.
Despite the current absence of agreement on the overall shape and detail of the new ‘FV’ IAS, there is enough certainty and, it is to be hoped, enough urgency for companies to be starting to plan their implementations. It seems likely that any reluctance to embrace modern financial economics will have to be overcome and quickly to meet the EU’s 2005 implementation date.