International Actuarial Input to Global Insurance Accounting Practice

Why do we keep banging our heads against the wall?

Well, I guess the flippant answer is that at least we get some exotic international walls to head-butt.

For the past 15 years, the Insurance Accounting Committee has been providing input to the IASB on the International Financial Reporting Standard for insurance contracts. Suddenly the answer is no longer: “In about five years” to the question: “When is IFRS 4 Phase 2 going to happen?” Things are getting exciting!

Current activity on IFRS 4 Phase 2

The latest meetings of the IAA’s Insurance Accounting Committee and Education and Practice Subcommittee in Zurich in April left us all in a bit of a quandary about the actions we needed to take and when to take them.

On the one hand, the International Accounting Standards Board (IASB) is increasing the pressure on itself to meet its current promise that …” (T)the final standard is expected in 2015”. Whether this means a final version of IFRS “X”¹ at 11.59pm on 31 December 2015, or further necessary delays, is still not absolutely clear. However, discussions with the IASB are becoming increasingly pragmatic, and a phrase that keeps resurfacing is the application of the new standard “(without) undue cost and effort” (In other words, the standard may well end up leaving a fair amount of room for interpretation by insurance entities and auditors alike.)

On the other hand, any “forced” decision is likely to leave even more uncertainty in its application than was already expected to be the case.

This potential outcome is increasingly leading the international actuarial community to help provide early guidance for interpretation of actuarially-related issues, rather than wait for the standard to be published before issuing such guidance.

Our current focus is on a series of “International Actuarial Notes” (IANs)² that are intended as support for the implementation of IFRS X. We have flagged the subject matter that we think is most urgent (either because issues are already essentially settled within the draft IFRS X, or because they are likely to need significant assistance from actuaries in their implementation).

The subjects for contemporary emphasis include:

• overall measurement (i.e. effectively how the “Building Block Approach” – or BBA – is applied);
• current estimates;
• discount rates;
• risk adjustment;
• measurement of the Contractual Services Margin (or “residual margin” in early exposure draft parlance);
• premium Allocation Approach (PAA) (i.e. the approach being allowed for contracts of one year or less, provided it is a reasonable approximation for the BBA);
• embedded derivatives;
• contract modifications;
• presentation issues (actuarial perspective);
• participating and performance-linked contracts;
• classification of contracts (including contract boundaries);
• business combinations (including portfolio transfers);
• transition issues;
• change in accounting policy; and
• self-insured workers compensation (linked to IFRS X, but directly supporting IAS 19).

The Actuaries Institute is already active in supporting these subjects through the International Accounting Standards Committee (Chair: Grant Robinson). However, given the breadth and detail of the various potential inputs, I’m sure Grant would welcome any new volunteers.

Whilst the IANs represent the bulk of our current activity, we are also supporting IFRS development both “above” and “below” the level of IAN development.

In a higher echelon is the development of a new International Standard of Actuarial Practice (ISAP) – being developed through the Actuarial Standards Committee. The plan behind this ISAP 4 is that it is sufficiently detailed to be relevant for actuarial work on IFRS, and yet broad enough to be attractive for adoption by member associations of the IAA.

Supporting the IAN development from “beneath” is further work on broader educational matters. We have already supported the publication of actuarial monographs (i.e. long-ish educational texts) on “Stochastic Modelling – Theory and Reality from an Actuarial Perspective” and “Discount Rates in Financial Reporting – a Practical Guide”³. Currently a monograph on risk adjustments is being drafted, with the bulk of the work being outsourced to Deloitte’s international actuarial group. The main aim behind these monographs is to filter the vast amount of actuarial literature to identify and promote the appropriate elements of practical usage around the world.

Implications for Australian Actuaries

Things on the non-life insurance side of things are pretty well finalised. Effectively, use of the PAA (expected to be applicable in the vast majority of cases) means very little change to the current IASB 1023 approach, albeit that there may be some adjustments to the liability adequacy test (“onerous contracts” test) and some loss of risk parallels in the treatment of emergence of liability. So, if anything, a small step backwards for us unfortunately. On the plus side, any Australian actuary can already claim to be an expert on IFRS X if they are looking for overseas work!

Life insurance is (still) a clouded area, especially regarding the treatment of par. contracts, but hopefully the right decision (whatever that is) will soon be made by the IASB, and our IAN activity is already in place to assist.

Other Insurance Accounting Committee activity

The Insurance Accounting Committee (IAC) attempts to act as the global actuarial voice (or, at least, mouthpiece) of the membership of the IAA. It relies on feedback from membership through the biannual IAC meetings and through responses to minutes and reports (distributed to members and posted on the IAA website). In addition to having an MoU with the IASB, there are also close liaisons with bodies such as:

• the International Auditing and Assurance Standards Board, (through a seat on the Consultative Advisory Group of the IAASB);
• the International Federation of Accountants (A task-force of the IAA is currently looking at formalising this relationship);
• the International Valuation Standards Council, through a close working relationship on common issues; and
• the International Association of Insurance Supervisors (valuation issues) – the Insurance Regulation Committee provides the main contacts with the IAIS.

¹ At this juncture, it is not certain whether the new standard will retain the current number (4) or will be allocated a new number (17?)
² There are currently 26 potential “IANs”. However this level of granularity – useful for retaining focus in the drafting stage – is unlikely to be retained when the guidance is finalised
³ Both available through the International Actuarial Association (actuaries.org)

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