1. Preparing for Fair Value
This session will provide the fundamentals of fair value/economic value measurements for insurance contract assets and liabilities, including the particular requirements (and potential relevance) of FAS 157 “Fair Value Measurements.”
Moderator: Ralph Blanchard, VP & Actuary, Travelers
Panelists: Bruce Fell, Principal, Towers Perrin Gareth Kennedy, Manager, Ernst & Young Scott Lewis, CPA,Vice President, The Hartford
2008 CLRS – September 18, 2008

2. What is fair value (for a liability) ?
FAS 157
Fair value is the price that would be … paid to transfer a liability in an orderly transaction between market participants at the measurement date.
IAS 39
Fair value is the amount for which … a liability [could be] settled, between knowledgeable, willing parties in an arm's length transaction.

3. What is fair value (for a liability) ?
Key issues:
Transfer versus settlement?
Immediate versus orderly over time
How much do you reflect current market, if current market is in crisis
Observed market values vs. entity specific assumptions
Final definition for insurance liabilities is still in play!
Heirarchy
Level 1 – Observed values from a robust market
Level 2 – Observed values for similar items (robust market)
Level 3 – Discounted cash flow with risk margin
Risk margin based on what market requires for risk compensation
Fair value risk margin ≠ conservatism

4. Where does “fair value” apply?
FAS Fair Value Measurements
Defines fair value and provides guidance on how to calculate it.
Does not say when to use it.
FAS Fair Value Option
Gives companies an option to use fair value
Decision is made contract by contract.
Does not require it anywhere.
FAS 141R – Business Combinations (revised)
Requires fair valuing the acquired liabilities at fair value at their acquisition date.
Initial difference between fair value and FAS 60 value treated as a separate intangible asset
Intangible asset is “amortized on a basis consistent with the liability … consistent with the limited guidance provided by IFRS 4. “

5. Current debates IASB (International Accounting Standards Board)
Should insurance liabilities be at fair value? What is fair value?
When do you recognize premium (i.e., when is it “earned”)
When will they get done with insurance standard?
Board turns over in 2011 – Do they want to reeducate a new board if not done by then.
FASB (Financial Accounting Standards Board)
Should they join in IASB insurance project, or watch from the sidelines?
SEC (Securities and Exchange Commission)
When do they require U.S. registrants to use IFRS (International Financial Reporting Standards)
Transition rules?
How long does accounting profession need to be ready?
(Note: privately held firms follow FASB but not the SEC.)

6. Panelists
Bruce Fell, Principal, Towers Perrin
Gareth Kennedy, Manager, Ernst & Young
Scott Lewis, CPA,Vice President, The Hartford