Sylvain Goulet, FSA, FCIA, MAAA

1
The Grand Hyatt, Mumbai, September 4, 2006
Sylvain Goulet, FSA, FCIA, MAAA
W. Paul McCrossan, FCIA
2
Flexibility the key concept

• Move towards market consistent financial
  statements means market changes must be able to
  be reflected
• Move towards total financial resources means
  there is a need to explore probability
  distribution functions of results (and not just
  current estimates)
• Move towards stress testing means there is a
  need to be able to play what if

3
What does flexibility imply for actuarial
practice? Almost the same as realism!

• assets and liabilities that are market
  consistent and reflect changes in observed deep
  liquid markets
• explicit methods likely required / preferred over
  implicit methods
• current estimates should be available for all key
  financial, economic, and contingent variables and
  trends actively monitored and reflected
• risk margins over current estimates should
  reflect what an insurer would charge to assume
  the risk
• interest rates used should reflect current market
  conditions
• consistency of measurement of insurer assets and
  liabilities

4
The International Actuarial Association (IAA) has
Practice Guidance

• Seven IASPs so far (educational guidance)
• Several more in the works
• Plus the Blue Book
• Risk Margin Working Group report in the works

5
Three Part Capability for Financial Reporting
Needed

• A flexible general purpose financial reporting
  model should be developed and reconciliation of
  any differences between the general purpose and
  regulatory results should also be developed
• Total financial resources adequate to the risks
  assumed means risks must be assessed, monitored
  and reflected
• Stress testing (Dynamic Capital Adequacy
  Testing) capability should be developed

6
Ability to Perform the Liability Adequacy Test
Required Under IFRS 4

• Explicit models must be developed with which to
  estimate future policy cash flows in order to
  perform liability adequacy test.
• Such future cash flows must reflect not only base
  benefits but also any embedded guarantees,
  options or derivative embedded in the contracts.
• A comprehensive data base of all such embedded
  features should be developed and maintained asap.
• Current estimates of all relevant contingencies
  must be made and emerging experience monitored.
  This may require regulatory forbearance or
  regulatory encouragement.

7
Ability to Implement the Current Market Interest
Rate Option in IFRS 4 Should be Developed/Obtained

• There is no current requirement that current
  market interest rates must be reflected in
  insurance liabilities in IFRS 4.
• Given the tentative decisions of the IASB Board
  and the IAIS, it can safely be assumed that there
  will be such a requirement.
• The ability to test the effects of potential
  movements in current market interest rates may be
  required both to determine adequate total
  financial resources and to develop DCAT
  capabilities.

8
Steps Should be Taken to Develop / Obtain
Liability Measurement Systems that Directly
Reflect Risk Margins

• Current IASB thinking is focused on initial
  measurement and a no profit at issue criterion
  is likely
• Current IAIS thinking is focused on total
  financial resources and both quantiles and
  cost of capital methods are being examined
• Subsequent measurement considerations may require
  assumption by assumption application of the total
  risk margin (in my opinion)

9
Steps to be Taken to Handle Discretionary
Participation Features

• Document dividend / bonus practices (company and
  legal constraints)
• Ensure that liability measurement system can
  handle explicit dividend / bonus practices

10
Steps to be Taken to Prepare for Disclosure

• Effects of changes in key economic and actuarial
  assumptions will likely be publicly disclosed
• Effects of potential changes in economic and
  actuarial assumptions may be required for
  regulators / managements

11
Thank You

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