Fair Value Accounting

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Fair Value Accounting

• IASC Proposals

Peter Clark Current Issues in General
Insurance Barbican April 2002
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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• IASC proposals
• Discussion Paper November 1999
• Draft Statements of Principle

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• IASC proposals
• How does this affect General Insurance?

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• No difference in accounting between non-life,
  life, health or other types of insurance
• Reinsurance accounted for the same as insurance
• All accounted on annual basis, no three year or
  fund accounting approaches

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Liabilities and assets valued at Fair Value
• price between willing and knowledgeable buyer and
  seller

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Fair Value .. or Entity Specific?
• Entity specific is value or liability to the
  enterprise that holds it and may reflect factors
  that are not available to other market
  participants

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Assets generally at market value
• Liabilities at present value after adjustment for
  risk and uncertainty
• Adjustments for risk and uncertainty to be
  explicit

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Asset/Liability not deferral/matching basis - no
  UPR or DAC
• Unexpired Risk Reserve to cover future expected
  claims costs for unexpired portion of contracts
  sold
• Profit recognised at inception of contract
• even if multi-year contract
• Initial acquisition costs accounted for when
  incurred

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Risk and Uncertainty
• To include diversifiable and non-diversifiable
  risk
• Should reflect markets not entitys risk
  preference

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Desirable Criteria for Market Value Margin
• Objective
• Consistent
• Transparent
• Theoretically sound
• Practical

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• Format of Market Value Margin
• Adjustment to Discount Rate
• Explicit Additional Margin

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• How to Calculate Market Value Margin
• Deterministic
• Stochastic
• Distribution of future expected cash flows
• Bootstrapping
• Proportional hazards transform
• Others??

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• How will Business Classes be Affected?
• Which classes will have a Market Value Margin lt
  Investment Income?
• Which classes will have a Market Value Margin gt
  Investment Income?

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Fair Value Accounting - IASC ProposalsPeter
Clark CIGI, Barbican, April 2002

• What Next?