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Preparing for Fair Value

Gain insights on fair value measurements for insurance contract assets and liabilities. Explore FAS 157, IAS 39, and key issues like transfer vs. settlement and market reflection. Find out where fair value applies and current debates in insurance accounting.

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Preparing for Fair Value

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  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 PerrinGareth Kennedy, Manager, Ernst & YoungScott 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 157 - Fair Value Measurements • Defines fair value and provides guidance on how to calculate it. • Does not say when to use it. • FAS 159 - 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

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