Let’s Talk About The Fair Accounting For The Business Of Life Insurance

1. Let’s Talk About The Fair Accounting For The Business Of Life Insurance Makoto Okubo Project Team for International Accounting Standards, Life Insurance Association of Japan Bonn, September 19th 2001, IAIS Panel for Insurance Accounting

2. How people see Fair Value Accounting? Classification by general views on fair value accounting Regulators, Industry and other organizations Fair value accounting is generally not appropriate. • Joint Working Group of bank associations (US, Australia, Canada, Japan, EU, UK, France, Netherlands, Germany) Insurance accounting Fair value accounting is not appropriate for insurers. At least, certain special treatments are needed. • - GDV • (Germany) • - ACLI (US) • LIAJ (Japan) • - ABI (UK) • CLHIA(Canada) • IBC (Canada) • - ICA (Australia) - NAIC (The United States) - BAV (Germany) - CCA (France) - OSFI (Canada) - FSA (UK) - APRA (Australia) International Association of Insurance Supervisors * Fair value accounting is appropriate or acceptable. But, certain adjustments are required. • ASB (UK) • - AASB (Australia) • - AIMR (US) • - FASB (US) Fair value accounting is universally applicable without any exception （source) Comment letters to the Issues Paper, JWG, etc, Note: * The position on fair value accounting as the IAIS is still waited, due to various views of the member countries.

3. Life Insurance Products Are Diversified!

4. Insurance Accounting Rules Are Different!

5. The LIAJ’ s position on JWG • Disagree to the proposal which means “full recognition of fair value changes of all financial instruments in the income statements”. • An “insurance” project should be maintained and even developed to tune the standards be fit to the insurance business as a whole, not to insurance contracts. • The project should involve people in the practice and in the supervision of insurance industry in order to reflect deeper understanding of the industry. • Opposed to the application of the standards in present forms to life insurers, absent a change in the current proposal to consider specificities of insurance business.

6. Why LIAJ is opposed to the recognition of fair value change in the income statement? • Volatility of profit and loss due to fair value fluctuation • Obscures business operation figures, the most important accounting information • Is not consistent with the long term nature of the business • Interferes sound and stable corporate management • Will deprive policyholders and investors of profit opportunities, by forcing insurers to sell out their stock portfolios • Treatment of fair value change in the same manner as operating gains or losses • is not an appropriate performance representation

7. Why should unique aspects of insurance business be considered in accounting? • Insurance is the regulated industry. The focus on policyholders and the claim-paying ability is needed in general-purpose accounting • Insurance business is conducted more and more on a global basis. However, insurance products are widely diversified, deeply tied to the national and cultural traits • Introducing fair value accounting would make drastic and definite changes to the existing infrastructure. • Hasty adoption of such standards without careful discussions could result in serious damage to some country’s insurance system, and pose a huge threat to both policyholders and trading partners. • Life insurers are more than the firms acquiring and holding insurance contracts • Engaged in a series of risk management, spreading both the amount and timing of risks • Spreading the timing of risks is a focus of the insurance industry • Even under the framework of asset-liability method, it is necessary for life insurance accounting to adopt a system that incorporates a deferral and matching approach based on the spreading of the timing of risks

8. The LIAJ’ s position on the Issues Paper • It is not appropriate to regard all insurance contracts uniformly as financial instruments • Some features of service contracts. • Larger uncertainties in relation to the occurrence of insurable contingency risk due to the longevity of the contract periods. • Opposed to the application of a fair value standard to life insurance contracts under current circumstances • Fair value is defined as the amount at which the asset is exchanged or the liability is settled between knowledgeable, willing parties in an arm’s length transaction. Nevertheless, there is no such market for insurance contracts. • A fair value standard that does not consider the diversification of risk over time is inappropriate for the measurement of insurance contracts, because of the longevity of life insurance contracts. • Conservative assumptions taking long-term tendencies into account are necessary for the evaluation of liabilities. • It is essential to prepare statements emphasizing the insurer’s ability to maintain insurer’s solvency and capital adequacy. • In general, an insurer’s financial statements should aim to provide information mainly to policyholders, rather than investors. • Further examination is needed as to the interpretation of the IASC Framework as a basis for developing an International Accounting Standard on Insurance. • Basically support measuring assets and liabilities. Nevertheless, it is appropriate to incorporate some methods for deferral into the measurement of liabilities. • Measurement has to be based upon the life insurer’s expectations • There is no liquid market for life insurance liabilities.

9. ANNEX Presence in capital market (example in Japan) Percentage of ownership in the shares of all listed companies • Insurers, banks and non-financial companies have played an important role in Japanese stock markets. Percentage of stocks and bonds in the total assets (source Public Finance & Financial Statistical Monthly Report, 1999) • For Japanese life insurers, about 15% of the total assets are invested in stocks, while they invest 27% in bonds. % (source Insurance: life insurance statistics, National banks comprehensive financial statements, corporate business statistics, 1999)