consumers to handle the greater information they are given.25 In parallel there has been the extension both of the remit of regulatory supervision and of its delegation to independent audit to take on responsibilities that were traditionally those of the ‘Appointed Actuary’.26 In the UK, following the Morris Review (2005), the actuarial profession, and its ‘Actuarial Standards Board’, will now come under the oversight of the FRC. These changes and the related contests over ‘professional turf’ also reflect wider social changes and the increasingly pervasive nature of the ‘audit society’ (Power, 1997). Nevertheless at the same time the accounting framework is itself thereby faced with new challenges. The audit role in relation to valuation of policy liabilities cannot be fulfilled without employing the expert professional advice of an independent ‘reviewing actuary’ (FSA, 2004a). And the IASB and other standard setters have begun to find that their own conceptual frameworks seem inadequate to cope with the complexities and uncertainties of a business with such long-term horizons and with the need to reflect the respective rights of shareholders and policyholders, and of different generations of policyholders, in their participation in its results. The conceptual deficiencies of the current accounting model have also been highlighted by the protracted debate over how to account for financial instruments and the difficulties the IASB has been facing in getting full EU endorsement of IAS 39 (IASB, 2004b; cf. Horton & Macve, 2000).
Life insurance accounting is therefore an arena where both the objectives of the accounting (given in particular the differing rights and interests of shareholders and policyholders, including with-profits policyholders) and the various (shifting) roles of the respective regulatory authorities and self-regulatory bodies (including FSA, the actuarial profession, ABI, ASB, APB, IASB and the EU) and of other interested parties remain unclear. Thus it is arguable whether in the UK the consequences of not dealing earlier with potential underprovisioning of the TPLB were primarily attributable to a failure on the part of the FSA or of the ASB27 (cf. Penrose, 2004), given that it is the FSA’s solvency regime that governs distributions and capital adequacy, while the function of the Companies Act ‘true and fair’ MSSB accounts is unclear. While rejecting (at least for now) embedded values—even though they provide the information that is most valued by analysts (Horton & Macve, 1997)— FRS 27 comments (Appendix 4 para. 7.4): ‘Existing insurance accounting focuses more on the needs of prudential regulation than on the information needs of investors. As a result, the true and fair financial statements are not very good at providing shareholders with useful information about the value of their interests in the business.’28 But in the UK (unlike in continental Europe) the MSSB accounts are not in fact the basis for solvency regulation (the SSB—and now ‘twin peaks’—returns to the FSA are) so it is not at all clear what, if any, purpose they serve other than legal compliance with the EU IAD. The ASB’s introductory statement to the ABI SORP (2003) notes that ‘there are aspects of insurance accounting that do not align with other accounting practice’ (but without saying whether or not they are acceptable)
25 See for example the highlights of the actuarial profession’s response to the recent Morris Review of the profession set up following the Penrose report (www.actuaries.org.uk/files/pdf/news/MorrisHighlights20040909.pdf 9th September 2004).
26 Within insurance companies the traditional management roles of actuaries have been increasingly supplanted by CFOs (and CEOs) with accounting and/or finance backgrounds.
27 28 or internationally of the EU or the IASB At para. 7.8 it adds that it was decided not to prohibit embedded value for those entities currently using it in their main financial statements as it would mean forcing them ‘back on to a basis of accounting that the Board has acknowledged is very unsatisfactory—the MSSB basis (albeit modified by the FRS)’.