Minutes of the IASB Insurance Accounting Standards Committee Meeting Hong Kong 5 and 6 October 2001

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1 Draft 7 December 2001 Minutes of the IASB Insurance Accounting Standards Committee Meeting Hong Kong 5 and 6 October Attendees. Clive Aaron (Australia), Bill Abbott (U.K.), Ralph Blanchard (U.S.), Mo Chambers (Canada), Yuan Chang (U.S.), August Chow (Hong Kong), Stefan Engeländer (Germany), Rainer Führhaupter (Germany), Sam Gutterman (U.S. chair), Steve Handler (South Africa), David Hartman (U.S.), Hongjian Bao (China), Tom Karp (Australia), Esko Kivisaari (Finland), Jean-Michel Kupper (Belgium), Anva Khaltayev (Khazakhstan), Jean-Pierre Lassus (France), Won How Lo (Taiwan), Helen Martin (Australia), Nigel Masters (U.K.), Jean-Louis Massé (Canada), Nigel Masters (U.K.), Dan McCarthy (U.S.), Paul McCrossan (Canada IAA rep to IASB, vice-chair), Claude Méthot (France), Bruce Moore (U.S.), Donovan North (Hong Kong), Dave Pelletier (Canada), Jukka Rantala (Finland), Bill Robertson (U.K.), Ed Robinson (New Zealand), Michael Ross (U.S.), Richard Roth (U.S.), Fred Rowley (Australia), Dave Sandberg (U.S.), Craig Thornburn (Australia), Stuart Wason (Canada), Bob Wilcox (U.S.). 2. Minutes of last meeting in Paris. The minutes of the last meeting of the Committee in Paris in June 2001 were approved. Thanks again to AXA for hosting the meeting. Separately, it had previously been announced that Paul McCrossan had been selected as a member of the IASB s Standards Advisory Council ( SAC ). 3. IASB Insurance Accounting Project. Paul McCrossan provided a status update of the IASB s insurance accounting project. He indicated that the International Accounting Standards Board ( IASB ) has given its Insurance Contract Accounting project high priority, along with Performance Reporting, Share-Based Compensation, Disclosure for Financial Institutions, and Business Combinations. The current timetable for this project is as follows: - November 2001 draft DSoP will be submitted to the IASB by either the Steering Committee or the IASB staff. The current Steering Committee plus several additional members will then be transformed to a continuing Advisory Committee - Third quarter 2002 an exposure draft - Third quarter 2003 either a final standard or more likely a second exposure draft, with a relatively short due process period - Implementation, at least in the European Union, either first quarter 2005 or first quarter A significant portion of the meeting was devoted to discussing the current Draft Statement of Principles ( DSoP ) that was distributed in the weeks prior to the Committee meeting. Emphasis was placed on (1) aspects that the IAA should informally provide to the staff of the IASB that is completing the DSoP prior to the 1

2 November IASB Board meeting, (2) areas in which the Committee should address further, and (3) areas the IAA should consider addressing in its development of actuarial standards of practice and related guidance. Paul McCrossan and Sam Gutterman will convey to the IASB in an informal manner the suggestions generated. A key element of the draft is the Performance and Disclosure chapters that had not been distributed by the time of the Committee meeting. They will be distributed to the Committee when available, with a fairly short turnaround time provided for comments. Another chapter that needs more work is chapter 7 on performance-linked contracts. The Committee was urged to get their comments on this chapter to Sam Gutterman. The IASB has asked for our thoughts on this specifically. The role of the actuary in any revised insurance accounting or regulatory framework, relating to both general purpose and regulatory reporting, continues to be of prime importance and the Committee will devote attention to this topic during the upcoming years. 4. The Joint Working Group s draft standards on financial instruments. A week before the meeting, the Committee submitted draft IAA comments to the IASB regarding the JWG paper addressing future accounting for financial instruments and related items (a comprehensive approach to fair value of these instruments). It will be sent shortly to IAA members for their approval. Paul McCrossan indicated that this project has been given a medium priority by the IASB. 5. Other accounting exposure drafts - The International Federation of Accountants ( IFAC ) has distributed two exposure drafts to which the IAA might consider responding (1) standards for provisions for governmental institutions, similar to IAS 37 and (2) reorganization of the IFAC s Committee on auditing standards. Sam Gutterman will circulate possible comments on the second of these very shortly; Ralph Blanchard and Bill Abbott (or individuals that they will identify) agreed to develop comments on the first for the Committee s review. - The IASB will be coming up with several exposure drafts of changes to existing standards within the next several months. The Committee will respond when deemed appropriate to do so. 6. Actuarial standards for compliance with new IASB insurance accounting standards. A significant portion of the meeting was devoted to the Committee s initial discussion of the topic of actuarial standards of practice for actuarial work performed to assure an insurance company s compliance with the proposed new International Financial Reporting Standard ( IFRS ) on insurance contracts. It was agreed that this should be given a very high priority by the IAA and should be addressed in the immediate future. It was agreed that these standards would likely 2

3 serve an important and necessary function in the implementation of new international accounting standards. In fact, without such standards, it may be difficult to assure that reliable and comparable results will be produced. It was agreed that time will be very important in order to assure that the new accounting standard would be able to implemented in the 2005/2006 timeframe. Insurance companies complying with this timeframe need to know beforehand what actuarial standards will apply. The Committee discussed several aspects of the development of an actuarial standard, focusing on (1) various aspects of the standard, (2) the need for possibly considerable maintenance of the standard after it is adopted, (3) possible organization structure that could be used to maintain the standards, (4) educational needs with respect to implementation of the standards, and (5) geographical areas in which needed practice has not developed sufficiently to comply with the certain of the requirements of the likely accounting and actuarial standards. The Committee will form a subcommittee for this purpose, including representatives both from IAA members with current standards and those without, with appropriate coverage of insurance practice areas, and at least several members with extensive actuarial standards development experience. Volunteers are welcome (let Sam Gutterman know who these are). A leader for this effort is currently being recruited (subsequent to the meeting, Paul McCrossan and Francis Ruygt were appointed as cochairs). As well, funding necessary for this effort was discussed. If possible, it was generally agreed that this effort could not be funded through the currently agreed upon dues schedule for IAA members. There was considerable discussion of the effort needed to maintain standards after their initial adoption. Alternative organization structures were discussed. It was agreed that it would be desirable that one output of the subcommittee s efforts would include a recommendation as to how best to organize this effort, e.g., continued subcommittee effort, a separate standards structure that would cover more than just insurance accounting standards (assuming that it might be appropriate for pension accounting and regulatory accounting standards to be considered in the future). The Insurance Regulations Committee indicated that it would be following our Committees efforts with extreme interest. The IAA Professionalism Committee will be kept informed as the Committee s efforts develop. It was felt that there might be a need to sponsor or co-sponsor the development of educational material or development of practice guidance material. It was determined that this aspect would be considered as standards are being developed. The topic of the effort needed to roll out new standards, particularly in emerging professional areas was discussed. 7. National activity. Relevant activities in different countries were reported on: 3

4 Japan. An independent accounting standards setting organization has recently been formed. A task force has been set up by the non-life insurance industry association to study fair values and develop models to develop fair values, with the objective of developing these models prior to field tests in Japan in February. South Africa. All future standards will conform to those of the IASB. They held a successful seminar on developments in international insurance accounting. US. The FASB implemented SFAS 133 regarding measurement of derivatives and embedded options. This has proven to be quite complex and difficult (and expensive in many cases) to implement. FASB has also adopted SFAS 141/142 on business combinations, outlawing pooling and having goodwill subject to impairment tests rather than automatic amortization. The American Academy of Actuaries is planning to put out a white paper on fair value issues. UK: The Institute/Faculty of Actuaries has a working paper on life insurance valuation for discussion in October and a sessional paper on fair value accounting in November Bill Abbott will circulate these to the list-server when available. The Equitable (UK) has had significant problems associated with annuity guarantees, possibly resulting a move toward required peer reviews (which might be advisable for the Professionalism Committee to study). Australia. A new draft on property/casualty regulatory accounting has been prepared. The Australian Institute submitted its own comments to the JWG paper, as did the American Academy of Actuaries. New Zealand. New Zealand is trying to harmonize its rules with those of Australia. Their life insurer taxation is being revised. Performance reporting is a significant issue for general insurers there. Hong Kong: The regulator will adopt IAS as much as possible in the future. They will have a property/casualty appointed actuary system. Kazakhstan: It uses an adapted form of IAS accounting. As of January 2002, an actuarial review of accounts will be mandatory. The Casualty Actuarial Society is conducting a project studying reporting volatility. Europe: The European Commission has issued a formal proposal to require IAS for listed companies by Canada: This year-end moving to more aggregate (as opposed to seriatim) valuation modeling, to look at a minimum of seven interest scenarios, using the worst result. They also have a task force looking at sources of volatility and ways to manage them. 8. Future committee meetings. The next regular meeting of the Committee is currently scheduled in March 2002 prior to the International Congress of Actuaries in Cancún. Although it is possible that a meeting devoted to the development of Actuarial Standards might be held prior to March, it was felt to be premature to schedule such a meeting. 9. Other matters. Subsequent to the meeting, it was agreed that Paul McCrossan would be put forth to Council as a vice-chair of the Committee. In effect, he has been acting 4

5 in this capacity as a representative to the IASC/IASB Insurance Steering Committee; this will confirm his importance to the Committee s efforts. Also, subsequent to the meeting, the Nominations Committee has indicated that it would like to have the Committee review its Terms of Reference to assure that they remain appropriate. Respectfully submitted, Sam Gutterman, chair 12 November