International Association of Insurance Supervisors. Mail/ Ref.: 7-010

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1 International Association of Insurance Supervisors 11 February 2004 Mail/ constitution@iasb.org.uk Ref.: Mr Tom Seidenstein Director of Operations and Secretary IASC foundation 30 Cannon Street, London EC4M 6XH United Kingdom IASC Foundation Constitutional Review Dear Mr. Seidenstein, The International Association of Insurance Supervisors is pleased to offer its comments on the consultation paper Identifying Issues for the IASC Foundation Constitution Review. The IAIS is an international organisation composed of insurance regulatory and supervisory bodies from more than one hundred and sixty jurisdictions. One of the main objectives of the IAIS is to set consensual standards that insurance supervisors around the world may adopt within their jurisdictions. Our interest in the development and implementation of high quality financial reporting standards has been on record for some time, especially in view of the acute need for a single, globally recognized and accepted approach for insurance liabilities. We have also provided significant input to those IASB proposals that will most influence the overall accounting model for regulated insurance enterprises in the interest of providing a meaningful, economically sound portrayal of these enterprises activities to the external markets. The overall objectives of prudential regulators are not significantly different from those of the markets, in that both are interested in a true representation of underlying financial performance and an assessment of the solvency of insurers. However, prudential regulators need to take a more conservative view in assessing whether insurers will remain solvent under adverse scenarios and what level of capital insurers need to do this. The markets are more interested in solvency from a going concern basis, so prudential regulators and the markets are likely to put a different value on an insurer s insurance liabilities. Notwithstanding this difference in perspective, we believe that wellcrafted external financial reporting standards, which can accommodate and disclose these differing perspectives, should be the objective we both strive to achieve. 1

2 For this reason, we have taken an increasing interest in the processes surrounding the creation of various types of standards that support the financial reporting process. Our detailed comments on the IASC Foundation s proposal are attached. The IAIS Accounting Subcommittee, chaired by Mme Florence Lustman (Secretary General, Commission de Contrôle des Assurances) has assisted in the development of this response. If you have any questions, please feel free to contact Mme Lustman ( florence.lustman@cca.finances.gouv.fr, tel.: ) or Mr. Luc Cardinal at the IAIS Secretariat ( luc.cardinal@bis.org, tel.: ). Yours sincerely, Manuel Aguilera Chairman, Executive Committee Tom Karp Chairman of Technical Committee Cc: Malcolm Knight, General Manager, Bank of International Settlements International Association of Insurance Supervisors c/o Bank for International Settlements, CH-4002 Basel Switzerland Telephone: Fax: Website: iais@bis.org 2

3 International Association of Insurance Supervisors Comments on the Consultation Paper Identifying Issues for the IASC Foundation Constitution Review Introduction The International Association of Insurance Supervisors ( IAIS ) is committed to supporting the efforts of the International Accounting Standards Board ( IASB ) to develop high quality accounting and reporting standards that will be accepted and implemented globally. We would like to make two general comments before presenting our detailed views. First, we recognize the importance of bringing to bear the highest calibre of technical expertise and unbiased professional judgment to standard-setting efforts. At the same time, we believe that the overall process for developing these standards must include sufficient transparency and accountability to ensure that strengths, without appropriate checks and balances, do not risk becoming weaknesses. Second, we believe that the recent exercise undertaken by the International Federation of Accountants ( IFAC ) to create a robust oversight structure for its public interest activities may provide an interesting template for the Foundation to consider at this time. Some of our detailed comments have been drawn from our knowledge of and support for this separate initiative. We present our detailed comments by section, focused primarily, but not exclusively, on the questions posed therein. Where we have not responded to a specific question we neither support nor reject the proposal involved. A Name and objectives Paragraph 2 refers to the public interest, although this term is not defined and can be construed in either a broad or a narrow sense. Although perceptions exist that insurance regulators are focused on different objectives from those of capital market regulators, the reality is that we also serve the public interest and our objectives are more aligned than not. Therefore, we would like to see this important term defined in a manner that acknowledges the need to identify and wherever possible meet the needs of all regulator-users and others acting in the public interest. Should there be a specific objective to address the special challenges facing small and medium-sized entities (SMEs)? We believe that special challenges exist not only for these enterprises but also for large segments of emerging economies (see also question related to paragraph 23). Some of our member countries are already familiar with differential reporting regimes designed to provide relief to smaller, private or otherwise lower public interest enterprises and 3

4 believe that such relief is beneficial and advisable as long as key underlying financial reporting principles are not compromised. 4

5 C Trustees The Trustees have a largely fixed geographical distribution. Is such a fixed distribution appropriate, or does the current distribution need review? Although a broad distribution of professional backgrounds is clearly necessary, is the distribution enshrined in the Constitution appropriate? The IAIS recognizes the primary importance of geographical distribution at this level of the structure. In order to ensure that the interests of emerging markets would be preserved, we recommend that at least one of the Trustees should either be appointed from a developing economy or have an expertise of the specific issues these economies deal with. However, the Constitution is largely silent on the other important component the distribution and balance of skills, experience and independence necessary to ensure thorough and objective assessment of both the due process model and the Board s performance within that model. It is unclear, for example, whether representatives of the firms would come from the technical accounting or auditing stream. It is also unclear what experiential criteria would be applied to the selection of at large members. Although the existing slate of trustees reflects a good balance, we believe that more transparency surrounding the selection of trustees would be advisable. Subparagraphs 14 (a) and 16(c) The IAIS is concerned about the potential conflict created by these two subparagraphs, especially if fundraising is viewed to be the predominant objective of the Foundation. Short of creating a separate oversight board, the route taken by IFAC, the Foundation should identify ways and means to support a rigorous and independent oversight function that does not risk being compromised by the Foundation s fundraising obligations. The intention of these provisions is to protect the independence of the standardsetting process while ensuring sufficient due process and consultation. Does there need to be a specific requirement for the Trustees to review the strategy and the procedures of the IASB at intervals? Yes. It is unclear whether the Foundation s mandate includes the creation and use of performance measures related to the activities of the IASB, but the IAIS believes such measures and their application are critical to establishing a fully transparent and accountable standard-setting function. In particular, to the extent that existing due process provides for the exercise of Board judgment on taking or bypassing certain steps, the Board should be held accountable for their decisions. This type of examination may be particularly important on projects viewed as highly controversial. 5

6 Paragraph 18 Should the language of the Constitution be changed to require a review of the Constitution at least every ten years rather than every five years? No. Five years is a minimum, and the Constitution should provide for the possibility of more frequent reviews if facts and circumstances suggest this is necessary. Paragraph 19 Should the number of IASB members be reduced to make the Board more workable? No. The Board appears fully functional at its present size and needs to provide for necessary diversity in its membership. Should the part-time positions be eliminated in recognition that the workload of IASB members is heavy and requires substantial time for consultation with interested parties? Yes, if there is evidence that members are materially conflicted. However, members with current external responsibilities can also provide a valuable additional source of external perspective to fellow full-time members. Paragraph 22 Should the requirement for this distribution of particular professional backgrounds be relaxed in light of the desirability of attracting the best-qualified individuals? The IAIS would suggest that the current mix be maintained if possible. As members with either a technical accounting background or a knowledge of the specific industry-based issues which the IASB active projects deal with are most relevant, this should be made more specific in the criteria. Without bias, the IAIS would also suggest that a technically competent candidate with exposure to financial supervision or regulation would provide a valuable new perspective and additional balance to the Board. Paragraph 23 Does this kind of formal liaison relationship seem important for ensuring convergence of accounting standards? Should special consideration be given to liaison with emerging economies, not currently represented by the existing liaison relationships? Liaison with emerging economies ties into the need identified under paragraph 2. However, any liaison should probably be established with an organization which itself represents a number of emerging economies to ensure that the needs of more than one emerging economy can be taken into account. 6

7 Paragraph 24 As noted under the questions for paragraph 19, the IAIS recognizes the need for parttime members in particular to deal with potential conflicts of interest. Even full-time members may encounter conflicts, for example if assigned to liaison duties with their home country standard-setters. While board members are required to sign a commitment document, we believe the IASB s governance framework should also include a separate conflict of interest policy that is both robust and fully transparent. Paragraphs 25 and 41 Appointing the Chair of the IASB as Chief Executive of the Foundation is an unusual arrangement unless the role is carefully circumscribed. It would be useful to set out explicitly what the Chief Executive is not responsible for to eliminate confusion about any involvement in funding or oversight of his/her own performance. Paragraph 28 Commensurate with responsibilities assumed can be interpreted in several ways in the absence of an explicit tie to the full-time or part-time nature of the assignment. If there are other considerations that would affect remuneration levels, these should also be identified. Paragraph 31 The IAIS believes the current approval criteria set out in the Constitution need to be strengthened based on the importance of the decision in question. While a simple majority eight of a total fourteen members may be reasonable to support release of an Exposure Draft, something more robust is needed before final guidance documents such as standards and IFRIC interpretations, are issued. If the IASB wishes to establish a single rule to apply to all these documents, we would recommend a two-thirds board majority. With respect to other decisions, the current formula requiring support by a simple majority of a minimum 60% of the Board means that the common view of as few as five members will justify releasing other important directional material for public comment. We believe a more robust rule is also required here. Paragraph 32 The Constitution describes the principles and elements of required due process for the IASB. The IASB s procedures are listed in more detail in the Preface to International Financial Reporting Standards. If respondents do not believe the procedures laid out in the Constitution are sufficient, what should be added? The IASB s due process includes a number of steps that may or may not be executed at the Board s discretion. While the facts and circumstances of each project will be different, the IAIS believes the IASB should be held explicitly accountable for its decisions in this regard. This accountability should begin with the development of robust criteria to be applied at each discretionary decision point. Furthermore, the Board should 7

8 be asked to report to Foundation Trustees on projects where discretionary steps were not taken. One area where such improvements are needed is in the use of specialist advisory groups and in interactions with the Standards Advisory Council. At the moment, the Board operates under a rebuttable presumption that specialized advisory groups are required to provide assistance on major projects. However, major is undefined, and normally does not impose an absolute requirement under defined conditions. Criteria should be developed for this purpose and be embedded within the Constitution. Concerning the Insurance Advisory Committee, we believe that the current Committee does not fulfil its assigned tasks, as the number of its participants (more than fifty) and the fact that a full meeting is held only once a year do not allow it to function properly. Thus, we recommend the creation of a new ad hoc committee which would bring together, about 4 to 6 times a year, a reasonable number of selected members with different profiles (representatives from the IAIS, the insurance industry or auditing firms ). This Committee would closely co-operate with the Board on active projects related to the insurance industry. Paragraphs Is the manner of selection of the SAC chairman appropriate? With respect to the Standards Advisory Council, the IAIS observes that the IASB also appears to have full discretion over selection and timing of the subjects or projects to be brought to the Council for discussion. Furthermore, there is no mechanism that regularly provides feedback to the SAC on the disposition of its suggestions or a rationale for the Board s acceptance or rejection of various recommendations. Finally, publication of the minutes of SAC meetings just before the next meeting is not helpful. In our view, electing an independent chair from among existing members of the SAC and providing that chair with access to the trustees would help to address these issues. The IAIS welcomed the IASB s decision to hold public hearings during development of the final IFRS 39 and would encourage more regular use of that mechanism. While some limits should be imposed on the scope and purpose of such hearings, we believe the IASB should not discourage presentation of new or enhanced information based on respondents further reflection on the proposals under review. With respect to field tests, we are concerned that the IASB has been undertaking field visits which are designed more to sound out constituents reactions in the field than they are to provide true quantitative impact studies. Given the complexity and material impact of many of the Board s most recent projects, the IAIS firmly believes that actual field tests of the proposals should form an integral part of any project involving new or amended standards. Clear criteria, including when such tests would be conducted during due process, should be developed and published. 8

9 Paragraph 43 The IAIS believes that the independence of the staff, in relation to the different jurisdictions represented, is a strong principle which should be mentioned. In practice, while technical expertise should remain the key criterion for selection of competent IASB staff, there may be need for more geographical sensitivity to ensure both wellresearched and unbiased recommendations to the Board. One way to gain this additional sensitivity without imposing rigid composition requirements would be to seek individual staff members who have benefited from a wide range of geographical experience to complement those with more focused country backgrounds. 9