A recent survey by Milliman’s William Hines and Cici Zhang measures insurers’ preparedness for International Financial Reporting Standard (IFRS) 17. Responses to the survey’s 52 questions came from more than 90 companies around the world.
The Financial Accounting Standards Board (FASB) has proposed significant changes to accounting standards for long duration insurance contracts to address several stakeholder concerns. In this report, Milliman consultants discuss the impact of the FASB’s proposed changes on earnings and equity for several illustrative product types. They also examine the industry’s preparedness to adopt the new guidance.
The National Association of Insurance Commissioners (NAIC) has conducted two Own Risk and Solvency Assessment (ORSA) Feedback Pilot Projects. The aim was to provide high-level advice that insurers can utilize in their approach to the ORSA.
Milliman consultants Aaron Koch, François Dauphin, and William Hines discuss some of the NAIC’s findings and provide items that insurers should consider when completing their ORSA process in the paper “One year to go: An ORSA checkup.” Here is an excerpt:
ORSA in practice: The feedback Pilot Projects
The two Pilot Projects provided a laboratory for fine-tuning the industry’s approach to the ORSA. Regulators’ public feedback identified the following shortcomings (among others) related to the submitted “sample” Summary Reports:
• A tendency for insurers to simply attest to the existence of risk limits instead of describing them
• A lack of explanation of the methodologies underlying insurers’ internal capital models
• A need for some insurers, especially life insurers, to provide additional stress testing on liquidity rather than a single focus on capital
• A need for some insurers to more clearly identify internal “risk owners” and key risks
It is worth noting that the NAIC ORSA Working Group explicitly refrained from leveraging the above observations into further prescriptive requirements in the ORSA Guidance Manual. Instead, they characterized them as items that insurers “may choose to consider” when completing Summary Reports.
This approach of “comment but don’t codify” preserves the ORSA’s flexibility and should be healthy for the long-term prospects of the ORSA. Nevertheless, it may cause some short-term frustration for insurers trying to grasp what the ORSA might mean for them. So how can they best meet regulators’ expectations, particularly when there is still some lack of definition regarding what the full extent of those expectations might be?
The authors also list several risk-focused examination issues insurers should consider when completing the ORSA:
• Assess both the frequency and severity of risks. Some insurers present risks along a single continuum (low, medium, high)—or simply provide a listing of “important” risks. Assessing all risks along two dimensions allows for added insight into solvency evaluation (for example, low-frequency/high-severity risks are likely to be a bigger threat to solvency than high-frequency/low-severity risks). It also helps identify optimal risk mitigation strategies for a given risk.
• Consider the entire horizon. Certain insurance liabilities have long duration, which increases exposure to financial risk. This is especially true in the life insurance industry. What seems like a reasonable risk strategy in the short term may lead to suboptimal outcomes in the long term, while the opposite may also be true.
• Quantify risk for comparability. At a high level, this can be as simple as estimating the potential impact of a risk as a percent of surplus or reserves. Admittedly, not every risk is easily expressible in such terms. Additionally, there is sometimes a temptation to overstate precision and understate uncertainty once numbers are assigned to qualitative risks. Nevertheless, placing risks into numerical terms provides a picture of potential materiality for outside observers. Quantification also helps management prioritize mitigation efforts across types of risk that otherwise might be difficult to compare (for example, operational risk and reserve risk).
Progress continues to be made by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) toward the next exposure draft of an accounting standard for insurance contracts. In addition, the boards are moving closer to further changes to the accounting for the assets backing insurance contracts. However, convergence between the FASB and IASB appears to be limited, both for the insurance contract project and more generally.
This white paper provides an update on recent activity on these topics.