Correction – Materials Attached: International Accounting Standards Working Group to Vote on Tentative National Association of Insurance Commissioners’ International Financial Reporting Standards Model Positions Draft
May 18, 2010
The National Association of Insurance Commissioners (“NAIC”) International Accounting Standards Working Group (“IASWG”) will meet via conference call on May 20, 2010 at 11:00 a.m. (ET) to discuss and vote on adopting a draft of the NAIC’s tentative positions regarding the expected International Financial Reporting Standards Model on insurance.
An outline of various IASWG member positions is attached.
The following tentative positions to be communicated to the International Association of Insurance Supervisors (“IAIS”) and/or the International Accounting Standards Board (“IASB”) on the IFRS Model also were provided by the NAIC’s Casualty Actuarial and Statistical Task Force (“Task Force”), which indicated that it strongly supports the stated preference for a two-model approach (life separate from non-life):
A probability-weighted average of future cash flows – The Task Force does not support this methodology. To accomplish a probability-weighted average would require a reliable probability distribution, which is not available for property and casualty insurance. The Task Force believes any such calculation would not provide decision-useful information, saying that expected settlement value is more useful and obtainable, and produces reserve results whose accuracy can be more readily compared to earlier reserve estimates made by the insurer.
Subsequent measurement – gains and losses – Given the short contract period for property/casualty insurance and limited ability to know with certainty that profit has occurred before the end of the contract period, the Task Force supports the unearned premium reserve methodology. By the time enough information would be available to determine that pricing was inappropriate, the policy period (of typically six months to one year) would be nearly expired.
Time value of money (discounting) – The Task Force only supports discounting of property/casualty reserves for particular payments that are fixed and reasonably determinable. It further expressed that discount rates should not be left up to the judgment of the people signing the financial statements; but rather, the strongest possible standards and guidance should be established at minimum. If discounting is implemented, the Task Force expressed “grave concern” about the potential for increased insolvencies because of the policyholder protection inherent in a nominal reserve that is removed. It would be expected that, even with risk margins, regulators would have to increase capital requirements in order to compensate.
Margins – If discounting is implemented for property/casualty loss reserves, the Task Force finds a composite margin to be less objectionable, largely because it would support precision only where it is possible to have it. The Task Force does not believe that precision exists to differentiate between the risk and residual margin in practice. If this is to be implemented, the Task Force recommends that the strongest possible standards and guidance should be established, at minimum.
Run-off of Margins -While the Task Force continues to disapprove of this approach for run-off of the margins, it found less fault with the run-off over the claims period, explaining that recision and reliability of expected outflows is rarely reached when the contract is in force.
Acquisition Costs – The Task Force agrees that acquisition costs (or “transaction costs”) should be included at the appropriate cash flow timing. However, it does not support the measurement basis of a probability-weighted average of future cash flows.
In addition to these concerns, the Task Force stated that it believes the adoption of the IFRS Model would result in a considerable financial burden for small companies (and thus consumers), reduce transparency and imperil regulators’ ability to evaluate solvency. It went further to add that “The methods required to implement the suggested approach are in a rudimentary stage at best and imply a level of precision that is not possible to attain.”
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