begun at the same age may still be paying benefits 60-70 or possibly even more years later), the professional expertise and judgement of the actuary—which originated in the development of mortality statistics (Horton & Macve, 1994)—is needed to make the necessary estimates of these various elements of the valuation. In this system the role of accounting was traditionally limited primarily to keeping track of the investments and other assets and their return and of the operating expenses, while relying on the actuarial valuation for the periodic determination of how much ‘surplus’ in the fund was distributable by way of bonuses to policyholders and dividends to shareholders. Correspondingly auditors traditionally accepted the statutorily required actuarial certificates (which are published in returns made annually to the DTI4) as to the solvency of the fund(s) and did not regard it as part of their own duties to verify the adequacy of the funds in relation to their liabilities.
A number of pressures have caused a major re-evaluation of this approach— although as yet there is still no agreement on what should replace it. Various piecemeal changes and developments have taken place, and now the IASB is engaged on a project on accounting for insurance contracts which was begun by its predecessor the IASC in 1997, leading to the publication of an ‘issues paper’ in 1999 (IASC, 1999)) and exposure of a Draft Statement of Principles (Insurance)(‘DSOP’) in 2001 (IASB (2001).5 The IASB’s project has now had to be split into ‘Phase I’ and ‘Phase II’ in order that some (limited) improvements could be completed in Phase I6 in time for the deadline of the adoption of international accounting standards for listed companies by the European Union with effect from 1st January 2005. The major issues that have held up progress and have now been postponed to Phase II are those relating to life insurance, and in particular the issues relating to the fair value of long- term insurance contracts (including the treatment of the deposit floor7 and the timing of recognition of profit), the treatment of ‘deferred acquisition costs’, the ‘unbundling’ of the insurance and deposit elements of contracts, the role of investment returns, the treatment of future premiums, the acceptability of ‘embedded values’, the accounting for participating contracts (e.g. with-profits), the accounting for the ‘estate’ and the Fund for Future Appropriations (‘FFA), policyholder accounting and accounting for mutuals. In short, after some seven years of deliberation, almost all of the key underlying conceptual issues are still to be resolved. The next step will be publication of a discussion paper but no date has yet been set by IASB for this or for the completion of Phase II.8 In the UK, the ASB (at the request of the Treasury) has recently begun its own project (ASB, 2004a; 2004b).
Meanwhile there have been a variety of other developments in various arenas. One significant change has been in the practice of UK auditors, who have increasingly taken upon themselves the task of ‘double-checking’ the actuarial valuation underlying the annual Companies Act accounts and the annual solvency returns under the ICA/FSA regime, even though the formal certificate has remained that of the ‘appointed actuary’. Audit firms have increasingly employed their own actuarial
4 Now to the FSA (FSA, 2001). In the case of ‘bancassurers’ the solvency regime is also changing with the introduction of the EU Capital Requirements Directive and ‘Basel 2’ (see e.g. http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2005/sp236.shtml [accessed 12.6.05])
5 The DSOP is incomplete and was not endorsed by the Board—it is available at http://www.iasb.org/current/iasb.asp?showPageContent=no&xml=16_18_67_11072003.htm (accessed 13/3/2005)) IASB (2004a) mentioned by P.Wright at the sessional meeting of the Institute of Actuaries, London, 28 February 2005 at which O’Keefe et al. (2005) was presented. h t t p : / / w w w . i a s b . o r g / u p l o a d e d _ f i l e s / d o c u m e n t s / 1 6 _ 1 8 _ i n s u r a n c e 2 - p s . p d f ( a c c e s s e d 1 3 / 3 / 2 0 0 6 7 8 5 )