MILLIMAN
Figure 2: Effect of discounting on calendar-year incurred losses
115 110 105 100 95 90
Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10
IFRS at Constant 3.2% Rate IFRS at Actual 2002 to 2011 Rates
More detailed reporting The move to a principles-based approach gives organisations much more latitude in determining the best way to calculate reserves. These choices must, however, be well justified, because along with this freedom comes the responsibility to disclose and create an auditable trail for those reasons behind their choices. Such disclosures might include:
• Exposures to risk and how they arise; • Objectives and policies for managing risk; • Concentrations of insurance risk; • Actual claims versus previous estimates;
• The effect of each change in inputs and methods, together with an explanation of the reason for the change;
• The yield curve (or range of yield curves) used to select the discount rate; and
• A maturity analysis of net cash outfl ows on an annual basis for the fi rst fi ve years, and in aggregate for maturities beyond fi ve years.
Clearly, if even some of these disclosures are required by the fi nal regulations, the reporting process for insurance entities will require additional effort. The new methods of calculating insurance reserves
will require accountants to perform additional types of balance sheet reconciliation as well.
A changing landscape The convergence of GAAP and IFRS will have signifi cant consequences for reporting and reserving in captive insurance entities. The most signifi cant and likely impacts include:
• More input required from management: Under a principles-based approach, there are many more decisions to be made. These decisions should involve management, not just technical professionals, as they can have signifi cant effects on the company’s balance sheet. Actuaries and accountants should be prepared to explain the decisions and their likely effects to nontechnical decision-makers.
• More work for auditors, actuaries, and accountants: The reserving and reporting requirements for captives will become more detailed and more involved, such as the need to estimate individual cash fl ows, select and implement a risk adjustment model, and so on. This results in the need for additional disclosures and new types of reconciliation. All the professionals involved will have to put in more hours to perform the same function.
• Balance sheet impact: Many captive insurers will fi nd their reserve requirements going up. This results in delayed recognition of income and potential decreases in capital. Additionally, because of the requirement to use current-date interest rates for the discount building block, the reserve amount can vary signifi cantly because of changes in rates, in turn adding volatility to fi nancial statements from year to year.
Today, captives have ample opportunity to monitor the proposed changes and prepare for the potential impact on their workloads and their bottom lines.
What happens next? The next step is the issue in 2012 of exposure drafts from both IASB (an updated version) and FASB for comments. The fi nal standards for both are expected in 2013 at the earliest, with implementation in 2015 at the earliest. ●
Amy Angell, FCAS, MAAA is a principal and consulting actuary in the Boston offi ce of Milliman. She can be contacted at:
amy.angell@
milliman.com
CICA | Forty years of captive leadership
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