PHILIPPE TRAINAR PHILIPPE TRAINAR Ninth Annual Conference of the IAIS 8-11 October 2002, Santiago, Chile PANEL ON INTERNATIONAL ACCOUNTING STANDARDS FOR INSURANCE

Thursday, 10 October FFSA - 2 I would like to address the complex interactions between IAS, supervisors & insurance business from an European point of view :  IAS & Insurance business : convergence, anxieties & divergences  IAS, IAIS & Insurance business : anxietes, convergence & cooperation Introduction

Thursday, 10 October FFSA - 3 IAS & Insurance Business 1.Constrained exercise 2.Convergence 3.Anxieties 4.Divergence 5.Interim period  Endgame ?

Thursday, 10 October FFSA - 4 IAS & Insurance Business  Constrained exercise for European business  something imposed to business by public authorities  very short time deadline (2005) without exemptions, except for public enterprises, mutuals & companies establishing their primary accounts in Us Gaap  decision taken without any knowledge of the exact contents & and of its economic consequences  absolutely no reflections on the art and ways to master such consequences as volatility etc...

Thursday, 10 October FFSA - 5 IAS & Insurance Business  Convergence between IAS & insurance business  transparency, objectivity, understandability, practicality, relevance & reliability of standards  international standards, that is international comparability => easier job for multinationals  intersectoral standards, that is intersectoral comparability => reduced risk premium for insurer  defined principles, as opposed to precise rules => priority to economic substance over legal form  reference to market, that is to economic value => more coherent concept of value

Thursday, 10 October FFSA - 6 IAS & Insurance Business  Anxieties of insurance companies about IAS  a non transparent and non foreseeable process  existing standards do not seem well adapted to insurance business because of :  long term view of most insurance activities  large flexible intertemporal mutualization between generations of contracts in many countries  asset / liability management that lies at the core of insurance business and is key for understanding accounts  unclear regulatory and fiscal consequences of the new standards for insurance companies

Thursday, 10 October FFSA - 7 IAS & Insurance Business  Divergences between IAS & insurance business  “full fair value” can not be an implicit reference because most markets, particularly in insurance, are not continuously liquid => successful lobbying  “own credit worthiness” can not impact the measurement of insurance liabilities, because of legal constraints => successful lobbying  many European life insurance contracts falling in the scope of IAS 39 (ex : performance linked contracts) are not well treated by this norm  at minimum, IAS 39 should be completed

Thursday, 10 October FFSA - 8 IAS & Insurance Business  Necessary interim period  current situation : no norm for insurance contract and no completed IAS 39 => it is too late for 2005  2 criteria for interim regime : consistency (of asset & liability accounting) & cost effectiveness  => interim propositions of the European insurers :  for liabilities : current “prudent” practices as “best” practices + elimination of non IASB compliant ones  for assets : exemption of IAS, easing of “held to maturity”, further category of asset for insurer or shadow accounting  additional disclosures of assumptions, methods, sensitivities & embedded values

Thursday, 10 October FFSA - 9 IAS & Insurance Business  Endgame ?  general questions : how to recognize profit at inception & calculate market value margin  for life insurance => what true and fair view of unallocated surplus ? economic vs accounting view  for non life insurance => how to control entity specific assumptions ? Standardized vs specific one  general requirement : comprehensive field tests and comprehensive performance reporting  insurers have to set up reliable data, assumptions & sensitivity tests + explain volatility of results

Thursday, 10 October FFSA - 10 IAS, IAIS & Insurance Business  Potential conflicting expectations of supervisors & insurance companies  On the background of clear converging point of views & interests  Opportunity for supervisors & business to work together

Thursday, 10 October FFSA - 11 IAS, IAIS & Insurance Business  Potential conflicting expectations  business fears the consequences, for it, of the current developing debate on a potential opposition between true & fair accounting vs prudent one  business asks for one accounting standards when supervisors threat to impose separate regulatory & accounting standards if they are not satisfied  business asks for a complete review of “prudential” rules (solvency & asset rules) in order to tackle correctly higher volatility => also tax consequences  business fears current misunderstanding between financial & sectoral public authorities

Thursday, 10 October FFSA - 12 IAS, IAIS & Insurance Business  Clear converging point of views & interests  both want transparent, objective, practicable, understandable, relevant, reliable & comparable standards  both want coherent standards that the best financial information on the liabilities of insurers & on the effectiveness of their ALM  both want to avoid any artificial volatility or misleading financial statements  both want to find accurate information on “prudential” provisions in excess of “best estimate” ones in the future financial statements

Thursday, 10 October FFSA - 13 IAS, IAIS & Insurance Business  Opportunity to work together  we fully share the views expressed in the letter of Chairmans Aguilera & Roberts sent last june to sir David of IASB… except ch. 1 § 4 => a comprehensive presentation of the most sensitive issues for the insurance sector  IASB is in an educational process concerning insurance contracts => margins for constructive dialogue despite the short term deadline  at this step, past experience demonstrates that such a dialogue can produce some results

Thursday, 10 October FFSA - 14 We would probably have preferred to get a more progressive and less revolutionary international set of accounting standards. But IASB, with the support of European Commission & Ministers of Finance, decided differently and imposed an imprudent agenda. Regulators, supervisors & insurers should cooperate in order to get the less bad solution, an attitude that does not predetermine the final position of insurers. Suggestions for conclusion