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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 12 / 51

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as noted above, should be reflected in the valuation of policy liabilities.22 Thirdly, the overall valuation of policy liabilities in the accounts and statutory returns (the Technical Provision for Long-Term Liabilities (‘TPLB’)) is made on an extremely conservative basis but without it being clear just how conservative this is and whether or not it is being strengthened or weakened from year to year. Thus overall it is difficult to gauge just how ‘realistic’ the TPLB is. The FSA is therefore now introducing its requirement (effective 31 December 2004) for a new ‘realistic valuation’ methodology which addresses these three deficiencies of the traditional valuation of liabilities (FSA, 2004a) and alongside the traditional statutory solvency basis (SSB) will provide a ‘twin peaks’ test of life insurers’ capital adequacy (supplemented by ‘Individual Capital Assessments’ (ICAs)). 23

A notable feature of the rapid, dynamic developments of recent years has been the colonization of an area which traditionally was wholly the province of actuaries by the practices and discourses of the accounting and audit profession. The actuarial profession, in the UK and internationally, has faced the increasing challenge of explaining, almost translating, its own expertise—widely seen as mysterious and arcane—into the conceptual framework of accounting for the generality of businesses so that investors (and policyholders) may more readily compare their own investment in insurance companies and its risks and returns with alternative investment opportunities.24 This applies at the level of both retail and wholesale investors, heightened by the restructuring of the financial services industry as a whole. The UK actuarial profession has itself noted the impact of the changing ethos in society which now rejects paternalism and opacity in the construction of savings vehicles in favour of greater personal responsibility and transparency in product design—albeit as yet largely ahead of the complementary increase in public education needed to enable

that such obligations should be provided for as liabilities but insurers have so far been exempted from FRS12 (ASB, 2004a, b).

22 In the case of the Equitable this lack of provision was aggravated by the company’s policy of full distribution so that it had not built up an ‘estate’ and did not have the reserve that life insurance companies normally hold in their FFA to cover the ability to maintain bonuses (reversionary and terminal) at current levels, at least for a while (Penrose, 1994).

23 In the longer term, as explained by the Chairman in October 2002, the FSA expects the IASB to move to ‘fair value’ of insurance liabilities and then itself to follow in this direction (www.fsa.gov.uk/pubs/speeches/sp107.html ): cf. FSA (2004b). Convergence with published financial reporting is also foreseen by the EU under ‘Solvency II’ (e.g. http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2003/sp160.shtml [accessed 12.6.05])

24 The International Actuarial Association (‘IAA’) is currently developing International Actuarial Standards of Practice (Recommended Practices and Practice Guidelines) regarding IFRS. A number of Preliminary Exposure Drafts for ‘Practice Guidelines’ have been issued: http://www.actuaries.org/index.cfm?lang=EN&DSP=LIBRARY&ACT=STANDARDS (accessed 12.6.05 ). Such Guidelines ‘are educational and non-binding in nature. They represent a statement of appropriate practices, although not necessarily defining uniquely practices that would be adopted by all actuaries. They are intended to familiarise the actuary with approaches that might appropriately be taken in the area in question. They also serve to demonstrate to clients and other stakeholders and to non-actuaries who carry out similar work how the actuarial profession expects to approach the subject matter’ (http://www.actuaries.org/members/en/committees/IASBI/reports/stockholm.pdf ). The IAA would expect to ‘upgrade’ them to ‘Recommended Practices’ in due course. However both IFRS4 and FRS27 almost entirely avoid mentioning the need for actuarial input and the ICAEW (in its Technical Release TECH 4/05 (February 2005) has given only heavily qualified support to the IAA initiative: http://www.actuaries.org/CTTEES_ACTSTD/Documents/Comments1_2_ICAEW.pdf (accessed 12.6.05)

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