While International Financial Reporting Standard (IFRS) 17 provides little guidance about coverage units and the contractual service margin (CSM), insurers may be able to find quick but reasonable choices from current modeling philosophy or certain existing standards such as U.S. GAAP. Insurers should carefully examine the consequences and reasonableness of those choices in light of the characteristics of their businesses, as coverage units are very important factors for determining the future profit signature under IFRS 17. Milliman’s Takanori Hoshino, Kurt Lambrechts, Sjoerd Brethouwer, and William Hines provide perspective in this paper.
The Financial Accounting Standards Board (FASB) has proposed changes to the accounting for long-duration insurance contracts in four major areas. In this paper, Milliman consultants William Hines and Karthik Yadatore summarize the FASB’s original proposal and outline the key changes made during the re-deliberations.
Milliman is pleased to announce that Principal William Hines has been named an observer to the International Accounting Standards Board (IASB) International Financial Reporting Standard (IFRS) 17 Transition Resource Group (TRG). IFRS 17, which was adopted in May, represents a significant change from current accounting practices and is expected to require substantial effort from companies to comply. Hines is one of only three observers and 15 members that make up the TRG; the group was created to help support companies as they transition to the new Standard.
Hines was appointed an observer from the International Actuarial Association (IAA), where he chairs the Insurance Accounting Committee. He has spent the past 15 years actively involved in the insurance project, presenting research to the IASB’s Insurance Working Group, and to IASB members and staff. During the IFRS 17 development process, Hines was part of the American Academy of Actuaries (AAA) IFRS Task Force and Financial Reporting Committee, which provided input to the Board. He has been invited to speak at conferences around the world, and has published extensively on the topic of IFRS accounting for insurance.
William has extensive experience consulting, researching, writing, and presenting on IFRS 17. There are not many people who can say they’re passionate about financial reporting issues for insurers—but William is one such person. I’ve no doubt his expertise will be invaluable to the Transition Resource Group and the firms it supports as we make the significant transition to IFRS 17.
For more information on the appointment, click here.
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).