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The Actuary The magazine of the Institute & Faculty of Actuaries

Meeting report: Life accounting issues seminar

Perhaps unsurprisingly it was fair value
that created the majority of talking
points, both during the presentations
and continuing into the intervals. Presentations
from Anil Bangar and James Tufts
discussed the actual progress made so far
by IAS, possible interpretations of the
principles established, and the resulting
practical implications.
The broad principles of IAS are taking
shape and there seems to be an increasing
acceptance that fair value techniques
can overcome some of the perceived
weaknesses of embedded values. However,
there remains plenty of scope for
debate about the detail when it comes to
putting these principles into practice.
Issues that attracted comment included:
whether to use a pure market-based
fair value approach or an entityspecific
the appropriateness of market value
margins for non-economic assumptions;
the size of market value margins if
they are deemed appropriate;
whether to use the gilt rate or the AA
bond rate less a risk premium as the
risk-free yield;
whether this can all readily be explained
to the users of the accounts,
particularly the increased volatility that
may result from the introduction of IAS;
whether the IAS places an unnecessary
burden on smaller companies;
whether the IAS will be universally
accepted, particularly in the US.
Clearly, there is still some way to go
before the final picture becomes clear;
however, what is clear is that this issue
cannot be ignored and will require a
great deal of attention in the lead up to
Steve Mills then considered a slightly
different aspect of IAS, giving what is
probably best described as a layman’s
guide to deflators and risk-neutral valuation
techniques. The session gave a practical
demonstration of how these
techniques might be used without worrying
about how deflators are calculated
or about how to design a stochastic
investment model. Steve certainly helped
to remove some of the mystique surrounding
these techniques for those not
familiar with them.
Sessions from Alan Twigg (US GAAP)
and Tim Davy (the only accountant
speaking) together with Derek Wright
(achieved profits) gave updates on two of
our current reporting standards. These
provided useful detail on the latest developments
to these standards for the practitioners
in the audience.
Stuart Thompson outlined some of the
findings of the Fair Valuation of Liabilities
Working Party. The working party had
considered the prudential reporting
requirements in the light of fair value.
The conclusion drawn envisaged a prudent
fair value calculation, ie with substantial
margins, with a risk-based capital
requirement sitting on top. The general
consensus seemed to be that the conclusions
made common sense and that such
developments were highly probable in
the medium term.
It is becoming clear that the advent of
the FSA is radically altering the way the
life industry is to be regulated, with major
changes to be implemented over the
next few years. In his presentation Ian
Pickering of the FSA underlined the volume
of ongoing regulatory activity. In
the unlikely event that fair value does not
provide a sufficient challenge over the
next few years, then the introduction of
the Prudential Sourcebook, the withprofits
review, a review of the role of the
appointed actuary, and longer-term
changes to solvency requirements are still
likely to keep us all extremely busy.
Thanks must go to the chairman, Nigel
Masters, for shepherding the many questions
from a keen audience and still keeping
to time. Also thanks to all the
speakers for their input, and in particular
Steve Mills for helping organise what was
a highly productive seminar.