Discussion focused on chapters 4 and 5 of the draft statement of principles prepared by the steering committee. Click for Project Information and Links to Download the DSOP.

Chapter 4 - Estimating the Amount and Timing of Cash Flows

Principle 4.3

This principle was accepted, although there are issues around defining income tax, which need to be returned to.

Principles 4.4 and 4.5

In general, these were accepted, although there are issues with reliability, especially pertaining to future events. This is mitigated in part by the future event having a small probability associated with it.

Principle 4.6

There was discussion as to whether this principle was consistent with the proposed changes to IAS 16 as with regards the words 'reasonable and consistent'. It was noted that directly attributable costs are different according to whether you look at individual contracts or groups of contracts, and that the broader the group the more costs will be directly attributable.

Principle 4.7

This is related to exit values in a more general sense, and should be linked to other work done on exit values, as it is not insurance specific. It is not relevant to entity specific values.

Principle 4.8

It was only reluctantly concluded by the Steering Committee that fair value should reflect the insurer's own credit standing. Board members had issues with a sentence that started 'conceptually' and then talked about 'practical considerations'. Again this work needs to be considered more widely than just insurance contracts.

This concept is not specific to insurance contracts except:

• insurance companies exist to pay out , hence it is wrong to consider a scenario where they become insolvent; and
• users of the financial statements will look at the balance sheet to calculate solvency ratios. These may be distorted by liabilities decreasing in value as the entity's credit standing decreases. This is also an issue for banks. Principle 4.9 This was accepted in theory but it was noted that it has practical implications for other areas of accounting (i.e. it is not insurance specific). Principle 4.10 This was accepted in principle, but it was pointed out that if the Board accepts this it will be an extremely controversial area. It was noted that it is not the Board's place to determine solvency issues, such as ensuring that an insurance company has the resources to pay out in the event of a natural disaster. Principle 4.11 This was accepted. Chapter 5 - Adjustments for Risk and Uncertainty Principle 5.1 This was accepted. Principle 5.2 This was accepted. It was pointed out that the cash flow method will be best when risk doesn't run off evenly with time, which is usual. It was noted that the discount rate method will be better for disclosure purposes, and that in practise, it is currently the discount rate method that is used predominantly. Principle 5.3 The most useful information for users is a market basis price for entity specific cash flows. The issue is how to determine these. Some are easy, such as interest rate risk, as there are observable prices. However, it is harder when there are no observable prices, and even when there are, there may be knock-on effects, which are hard to assess. For example, a change in interest rates may change lapse rates. The words 'consistent methodology' were felt to be too restrictive. Methods should change as they evolve. The idea is to restrict random changes, not to prevent companies evolving their methods. It was considered as to whether market premium risk adjustment guidelines should be given (as they are in Canada). If they were it should be by way of practice guidance for actuaries on a national level, as international level would be too high. Additionally, the guidance must be capable of evolving over time. Principle 5.4 There were issues with diversifiable from whose point of view, as it may vary depending on whether it is viewed from an insurance company, policyholder or capital market investor's point of view. Undiversifiable risk is much easier to measure, and the lack of reliability of measuring diversifiable risk is grounds for exclusion. Additionally, there are links with the unit of account section, as the degree of aggregation will affect the amount of diversifiable risk. Principle 5.5 This needs to be looked at and discussed again as conclusions here depend on the conclusion for principle 5.4. Additionally, as it currently stands a unit of account is not defined, leaving entities a free choice. The Steering Committee was aware of this but unable to come up with a good definition. Some Board members were uneasy with no definition or guidelines in this area. Principle 5.6 This was accepted in theory, although it was noted that practical implementation may take a while as many companies don't currently have the systems in place, and those that do (mostly the larger entities) only use the models for pricing rather than measurement purposes. Also, the link between this area and IAS 39 was noted (whether to separate out embedded options and how to measure them). Principle 5.7 This was accepted in principle, although some Board members felt that the 'exceptional cases' qualifier was not necessary. Principle 5.8 This was accepted in theory, but it was noted that it was irrelevant to entity specific values. Also it was pointed out that it should be consistent with the JWG. Principle 5.9 This was accepted.