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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 40 / 51

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  • What is a " best estimate" - the mean, median or some other measure? The paper suggested using a mean, but what about product types where outcomes are highly skewed, as in general insurance or products with guarantees?

  • There could be problems from many of our traditional contracts not qualifying as insurance contracts under the suggested accounting definitions - how can we unify matters?

  • More generally, the profession needs to invest time in agreeing with FSA on how to treat accrued terminal bonus for reserving purposes, as there is no obvious way to do this. John Tiner, leader of The Tiner Review, emphasized the need to find solutions and better align statutory reporting and company reporting.

Better Communication of Results The transparency of Fair Value techniques was welcomed, but in the light of Equitable Life, we need to take care that our valuations are auditable and verifiable. This task is made more difficult if we need to use more complex techniques than in the past, including stochastic models. The actuarial profession has a vital role to play in educating different communities - and we need to start by educating ourselves (both students and qualified actuaries) in these new skills.

To allow fair comparative studies by analysts and regulators there may be a need for considerable levels of supplementary reporting. As an example, for some contracts, the regulations may disallow any assumption of receipt of future premiums

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    if so, how can we explain to investors and analysts the potential benefit if premiums

do continue? A clear theme was the need to concentrate hard on the presentation of results. One speaker (Goford) suggested companies should publish their year end balance sheet at the start of the year, then report the variances against expected results at the end of the year. A clear explanation of variances, pointing out how value has been created or destroyed, is vital. It's vital that we involve the analyst community in this regard, as they are prime users of the output.

Next Steps This is undoubtedly going to change the way actuaries work. We have some of the answers, but many other questions remain. The paper's authors were widely congratulated for their work, but it is only a first step. We all have a duty to keep up to date with developments, but there is an urgent need for more research and continuing liaison with the accountant community. In particular, a successor working party is needed. They will not be short of work.’

Our overall review comment: The Hairs et al. paper is a response by a Working Party of the actuarial profession to the emerging (and again lengthy) ‘DSOP’ (IASB, 2001), which was drafted by an IASB Steering Committee and which in the event, although released for comment, was never to be completed or approved by the Board. The paper addresses the major outstanding issues of concern as to what a ‘fair value’ basis for life insurance reporting would involve (in particular the tension between ‘market’ and ‘entity specific’ factors in valuation) while also addressing the IASB’s continuing reluctance to endorse EV.

One important issue raised in the discussion of the paper (p. 325), that tends to be overlooked in the consideration of the role of life insurance accounting, where generally the focus is on how far the accounting can and should reflect proper

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