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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 3 / 51

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Preface: Why is life insurance accounting interesting?

  • Important industry with current restructuring world-wide

  • ‘Proprietary’ and ‘mutual’ companies

  • Potential conflicts between ‘shareholders’ and ‘policyholders’ and their

interests

  • Non-profit and ‘with-profits’ policyholders

  • Subject to prudential regulation

  • Its accounting has always been based on a ‘net present value of future

cash flows’ model

  • Combines ‘insurance’ with ‘investment’ products

  • Arguments are over appropriate risk adjustments in future cash flows and discount rate and therefore timing of profit recognition

  • Interlinked with ‘financial instruments’ accounting

  • Potential implications for IASB/FASB projects on ‘revenue recognition’, ‘performance reporting’ and ‘conceptual framework’ more generally

  • EU Insurance Accounts Directive (w/e/f/ 1995) took about 20 years to agree and left many options

  • IASB’s project has been running since 1997: has only reached ‘Phase 1’ in IRFS4 (2004) which changes little in current variety of practices

  • New UK standard FRS27 (2004) following ‘Equitable Life’ scandal requires ‘realistic valuation of liabilities’ (like FSA) but does not change profit measurement basis

  • Frustrated industry has been producing its own supplementary current value based ‘achieved profit’ figures (using ‘embedded values’) (‘EV’), now endorsed by European CFOs as ‘EEVs’

  • Supplementary EVs, not ‘main accounts’, are focus of analysts’ interest

  • Actuaries are increasingly applying theories of modern financial economics to identify ‘market consistent embedded values’ (‘MCEV’)

  • How best to report ‘performance’ based on ‘change in EV’?

  • Effect of introduction of mandatory OFR?

  • Changing audit role and potential conflicts between actuaries and accountants/auditors over ‘professional turf’ in setting and implementing reporting standards

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