The papers also illustrate the difficulties caused and costs imposed by the IASC’s (and then IASB’s) approach in issuing a range of lengthy, complex but successively inconsistent documents as to what might represent its proposals for a life insurance accounting standard. The Board’s constituents have been faced with the problem of not knowing how seriously to take them as potential expressions of intent. If they had known when the first Issues paper (in two volumes) was issued (IASC, 1999) that the Board would still be ‘educating’ its own Board members about insurance as it embarked on ‘Phase II’ in 2004, they might have been spared a lot of unnecessary reading and effort devoted to inputting detailed responses.
a) Forfar & Masters, 1999 ‘Developing an International Accounting Standard
for Life Insurance Business’ This paper, prepared before the IASC had issued its Issues Paper on insurance, but at a time an international accounting standard was expected to be finalised by 2002, was intended as a ‘wake up call’ to the actuarial profession to try and find agreement on the appropriate accounting for life policies in order to influence ‘the accountants’ in deciding on the principles for life insurance accounting. It was presented at a meeting of the Faculty of Actuaries to which several prominent accountants were invited as guests and who participated in the discussion.
The paper notes that IAS 32 and (the then E 62 for) IAS 39 define fair value (‘FV’) as: 'the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction'
E62 for liabilities proposes that ‘other liabilities’ (i.e. other than trading securities and derivatives but presumably including insurance contracts if they were no longer excluded from the scope) would be measured at consideration paid on initial recognition and thereafter at ‘amortised cost’. This would induce mismatch between assets and liabilities. So can one determine a sensible measure of FV of liabilities? The intention is ‘the amount that the current insurer would have to pay to a third party to take the liability off his hands’: it is an ‘exchange’ value. But the insurance market only creates rather than exchanges liabilities; and on widely varying terms. ‘A FV measure that sought to establish a measure independent of the experience (expense, mortality, lapse, etc.) of the company concerned would cause a misleading and distorted statement of profits. The accounts are designed to measure the profits of the company concerned, and not those of an idealised ‘market’ company.’ (In the examples in Appendix B it is noted that if one uses a ‘market’ benchmark for costs then an ‘inefficient’ office will show an initial loss using FV and then subsequent profits at the (higher) market rate of return—an ‘undesirable result’.)
Absent good markets, IAS32 suggests ‘estimation techniques’ including discounted cash flow techniques—so presumably actuarial valuation techniques would qualify.
The valuation could either be done on a portfolio basis comprising the policy payments themselves (as hedged by a portfolio of gilts), plus an amount for the life office’s own expenses and profit margin. ‘This is effectively equivalent to an actuarial gross premium valuation of the portfolio at a market rate of interest (which allows for the average term of the portfolio) together with an explicit profit margin.’ Alternatively it could be equal to the statutory technical provision (possibly with the addition of any statutory solvency margin) less the present value of profits (‘PVFP’) that would emerge in the future from the statutory provision being rather conservative. In the UK when companies are bought or sold, portfolios would tend to be traded on this basis, where the PVFP would be calculated using a discount rate