Presentation on second IAIS Liabilities Paper1 Technical Committee 31 May 2006 IAIS Second Liabilities Paper Presentation to Technical Committee Rob Esson Chair, IAIS Insurance Contracts Subcommittee 31 May 2006

Presentation on second IAIS Liabilities Paper2 Technical Committee 31 May 2006 Outline of Presentation Outline of Presentation 1.Activity since first Liabilities Paper 2.Second Liabilities Paper - process 3.Second Liabilities Paper - key principles and observations 4.Main issues arising 5.IASB Workplan and future work for Insurance Contracts Subcommittee

Presentation on second IAIS Liabilities Paper3 Technical Committee 31 May 2006 Activity since first Liabilities Paper First Liabilities Paper published May 2005 Insurance Working Group meetings July and September 2005, January 2006 IASB Board now discussing Phase II at monthly meetings Insurance Contracts Subcommittee meetings July and September 2005 and monthly to date in 2006 IAA Risk Margin Working Group and interaction with IAA on Phase II issues

Presentation on second IAIS Liabilities Paper4 Technical Committee 31 May 2006 Significant work in 2006 at monthly meetings from January to April Subcommittee agreement achieved in April meeting 30 day consultation with members and observers General support from IAIS members, IAA and some observers Some disagreement from some sections of industry Revised draft circulated 25 May, following consultation No significant changes from consultation draft If approved, send on 1 June to IASB and publish Second Liabilities Paper - process

Presentation on second IAIS Liabilities Paper5 Technical Committee 31 May 2006 Measurement of an insurance liability should be based upon the future cash flows relating to full settlement with the claimant/beneficiary The IAIS supports an approach to modelling whereby observable inputs from deep liquid markets are used to the fullest extent possible, and the remaining elements are modelled. A common framework is appropriate to model non- observable inputs as objectively as possible. Where the amount or timing of future cash flows in uncertain, probability is a crucial factor in measuring the cash flows relating to the contract. Second Liabilities Paper - key principles and observations (1)

Presentation on second IAIS Liabilities Paper6 Technical Committee 31 May 2006 An exit model is preferable but profit on inception should be recognised only where an appropriate and sufficiently reliable risk margin in the liability measurement. Similar obligations with similar risk profiles should result in similar liabilities. Without prescribing any one method at this stage, any methodology for calculating the margin should share certain characteristics. The margin should determined in such a way as to promote transparency and comparability between different insurers in an objective manner. Second Liabilities Paper - key principles and observations (2)

Presentation on second IAIS Liabilities Paper7 Technical Committee 31 May 2006 Probabilities which reflect policyholder behaviour regarding the contracts as a whole are needed to achieve meaningful results. No requirement for application of surrender value floor to insurance liabilities for general purpose accounting. Future cash inflows should be taken into account in the measurement, if integral to the obligations under the contract. Cash inflows should be offset against outflows The IAIS would prefer full expensing of acquisition costs at inception with allowance for the future income to recover the costs taken into the measurement. Second Liabilities Paper - key principles and observations (3)

Presentation on second IAIS Liabilities Paper8 Technical Committee 31 May 2006 Discretionary benefits should be treated as liabilities based upon expected future cash flows, as treatment as equity would misrepresent the financial position. Derivatives embedded in insurance contracts should be taken into account in the valuation methodology. The credit standing of an insurer is not relevant to the valuation of insurance liabilities. Second Liabilities Paper - key principles and observations (4)

Presentation on second IAIS Liabilities Paper9 Technical Committee 31 May 2006 Some confusion over: –the subcommittee’s mandate –interaction with Solvency Settlement notion within an exit value approach Concern over profit on inception Potential need to look specifically at particular types of business (eg non-life) ‘Market consistent’ approach Need for testing Main issues arising

Presentation on second IAIS Liabilities Paper10 Technical Committee 31 May 2006 At IASB Discussion Paper expected December 2006 Presentation of Paper to Board Insurance Working Group meeting end June On-going discussion by Board prior to publication of Discussion Paper At IAIS Further work identified in paper (para 101) Consideration of IASB developments Output from IAA Risk Margin Working Group Any guidance from Technical Committee on priorities and workplan for Insurance Contracts Subcommittee IASB Workplan and future work for Insurance Contracts Subcommittee