1. Canadian Institute of Actuaries
PD-6 Update on International Standards
CIA Seminar for the Appointed Actuary 2004
Montréal, September 20, 2004

2. IFRS 4 and IAA Proposed Guidance
David Congram
Good afternoon
Well it is one year later and we are meeting again to address this topic
When I spoke last year I alerted you to start getting prepared
I am glad I did that as the train has left the station as I predicted.
I will not be repeating the review of the IASB standard as I did last year but will focus on the IAA guidance.

3. Adoption of IFRS/IAS
EU – publicly traded companies must apply IFRS/IAS for financial reporting in 2005
Major concerns with IAS 39 among banks (not approved by EU yet)
Insurers concerns through CFO forum
Regulators concerned about “fair value”
Affects Canadian branches/subs of European companies
US – FASB committed to working with IASB to achieve convergence
So first lets step back and ask who is affected?
Review slide
EU-listed companies and the Caribbean.
Australia - possible early adoption
So those in Canada with foreign parents reporting under IFRS, mostly the European parents I would guess, you will be reporting first quarter 2005
The expectation is with convergence the CICA will move Canada to IFRS in 2007/8. So for the rest of us who are responsible to perform DCAT this is now expected within the testing horizon as I mentioned last year. I am looking forward to hearing how this topic was addressed. I suspect a number of us last year indicated the basis was not clear enough to get a good assessment. With some of us now reporting on this basis we will need to consider how best to address this topic.
The implications of this change on the financial status of your business needs to be understood and I believe Management will want to know how it will affect their potential competitive position.

4. Target Implementation timetable
Those adopting IFRS
IAS 39 Report results Report results
IFRS 4 Report results Report results
Phase Report results
So for first time application of International Financial Reporting Standards this is the timetable in the top half
I included a similar slide with my presentation at the last AA seminar here in Interestingly the only thing that has changed is I have replaced ED5 with IFRS 4. Usually we expect some slippage. I expect 2007 will slip into 2008.
Normally you have to include a one year comparative so that means income statements for 2004 and The implication of that is you need to construct an opening balance sheet December 2003.

5. IFRS/IAS for “Insurance”
IASB has published:
IFRS 4 – Insurance Contracts
Significant insurance risk (e.g., term insurance)
IAS 32&39 – Financial Instruments
(e.g., certain annuities)
IAS 18 – Service Contracts
(e.g., ASO and Service components)
Contracts written by Canadian insurers would primarily fall under these three accounting standards
This definition will be used throughout all standards (IFRSs). A contract is insurance if the insurer accepts significant insurance risk by agreeing to compensate the beneficiary if the insured event adversely affects the policyholder or beneficiary.
Significant means at least one scenario with payment of commercial substance with an amount that is not trivial
Contracts issued by insurers are generally financial instruments. So, if a contract does not meet the definition of insurance, it will likely be an investment contract, to be measured under IAS 39.
However for investment contracts they need to be divided between their financial instrument component and the servicing component. Lets take a variable annuity backed by segregated fund. The management fee for the investment management is viewed as a service contract and would be viewed as a separate component from the assets in the fund which would be the financial instrument component.

6. Primary Provisions of IFRS 4
IFRS 4 allows insurance contracts to be accounted under local GAAP, with certain restrictions
Liability adequacy tests required
Certain existing practices may continue in Phase 1
Restrictions
No catastrophe provisions
No Claims equalization provisions
No offsetting of reinsurance assets or liabilities
Tests Required if accounting policies do not include
Liability adequacy, Impairment of reinsurance and recover-ability of deferred acquisitions costs
Most classic that if your existing policy is not to discount this can be continued

7. IAS 32&39 – Financial Instruments
Covers measurement of asset side of the balance sheet
Covers financial instrument component of investment contracts
GICs, term certain annuities
Election as “held for trading” or not
Held for trading measured at fair value; others measured at amortized cost
Any embedded derivatives at fair value
Amortized cost based on effective interest rate
DAC prohibited
Review the slide

8. IAS 18 – Service Contracts
Covers contracts service component of investment contracts and other contracts that are not financial instruments
ASO contracts etc
Matching of revenue and expense
DAC allowed but more restrictive definition than US GAAP
Claim service contracts (ASOs)
Self insurance (basic risk financing)
Deductibles
Note this is the manner in which acquisition costs can be deferred

9. IAA Insurance Standards
Practice Guideline (IAA Class 4) - Exposure Drafts
Actuarial Practice
Contract Classification
Measurement
Liability Adequacy Testing
Changes in Accounting policy
Embedded Derivatives
Discretionary Participating Features
Current Estimates
Disclosure
Reinsurance
Stochastic Models
So What Guidance has the IAA provided
First three exposure drafts in accordance with the IAA due process was published September 14, 2004, last Thursday. (I might add finally)
The balance other than Reinsurance and Stochastic Models are in the final review and voting by the Committee.
I have provided the URL where you can obtain these documents

10. IAA Insurance Standards - Actuarial Practice
Specific guidance
Disclosures
Scope and adequacy of Professional Services
Accounting requirements
Classification
Measurement
Participation
Liability Adequacy Test
Accounting Disclosure
Relevant Knowledge
Material Inconsistencies
General guidance
Disclosure in accordance with what IASP
Measurement includes unit of account, unbundled, service components
Material Inconsistencies
Aware of information not in conformity with accounting policy errors
Management may select measurement bases potential for misleading income

11. IAA Insurance Standards - Classification
IAS 18
Service Contract
Measurement
Significant
insurance risk
Create financial
assets or liabilities? No No
Yes
Yes
Service Element
IFRS 4
Insurance
Contains
Discretionary
Participation
Feature?
Yes No
Contains
service elements
Tests
Financial Instrument
Go through the slide
Embedded
Derivative Test
Tests
IAS 39
Financial Instrument
Measurement
Deposit Component
Financial Instrument

12. International Actuarial Practice Guideline Measurement
Measurement approaches addressed
Amortised Cost model
Fair Value model
Stage of completion
Structure
Approach
Models and assumptions
Updating
Accounting Requirements

13. Revised IAS 39: Measurement
Valuation
Technique
Market
Calibration
Fair Value Entire Contract
Options and Guarantees considered
Option Pricing
Models
Financial
Markets
YES
Election
Held for
Trading
Financial
Instrument
Fair Value
Option Pricing
Models
Derivative
Host
YES NO
Contains
Embedded
Derivatives
Amortized
Cost
Amortised Cost NO

14. Liability Adequacy Testing
Insurance Contracts and Investment contracts with Discretionary Participation Features (DPF)
IAS 37 applies if accounting policy does not meet minimum requirements
Application to pre tax/direct business
Where Investment Contracts with DPF classified as only liabilities. (When partially assigned to surplus additional requirements)
Service Contracts
IAS 16 Asset Recoverability
IAS 37 Onerous contracts
Does not apply to
If IAS 37 applies then margins for risk and uncertainty required

15. Other Practice Guidelines
Changes in Accounting policy
Embedded Derivatives
Discretionary Participating Features
Current Estimates
Disclosure
Reinsurance
Stochastic Models