The Younger Members Convention

1. abcd The Younger Members Convention 2-3 December 2002 The De Vere Daresbury Park Hotel, Warrington, Cheshire

2. abcd Fair values – FRS 17 for insurance companies? Michael White, PricewaterhouseCoopers 3 December 2002 The De Vere Daresbury Park Hotel, Warrington, Cheshire

3. Background What are fair values? What will be the impact? Unresolved issues Timetable Agenda

4. All listed EU companies report under IAS by end 2005 ....but no IAS standard for insurance contracts DSOP being prepared but standards not ready till after 2005 Principles are based around a “fair value” type approach UK regulation likely to follow similar principles to IAS The story so far.......

5. Letter from American, German and Japanese industry bodies CFO Forum FSA supportive – favours fair value approach for regulatory solvency US - harmonisation What has the reaction been?

6. “...the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.” “Entity specific value” So what is a fair value?

7. Options and guarantees Independence of assets and liabilities Reserve for (some) discretionary benefits Use of the yield curve Unified approach for life\general business Why is this different to what we do now?

8. Text alignment and case as Title page Text alignment and case as Title page Text alignment and case as Title page Unit linked contract with maturity guarantee

9. Conventional with profit contract Statutory Profit Fair Value Profit Achieved Profit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

10. Possible IAS format Value of new business Release of risk Change in estimates and assumptions Change in policyholder interest in surplus Format of the P&L Existing • Premiums • Investment income • Claims • Change in reserves • Expenses

11. Valuation methodologies

12. Complexity – jargon, fundamental change Modelling run-times Performance reporting Auditing Dynamic decision rules Choice \ calibration of model Is it going to be easy?

13. Investment strategy Securitisation Investor community Tax Third Party Administrators Product design What will be the impact?

14. Unit linked product 0.75% annual management charge £40 per year renewal expenses Guaranteed return of premiums at maturity Product design - example

15. Product design Impact of product design Fair value With guarantee

16. Product design Impact of product design Fair value With guarantee No guarantee

17. Product design Impact of product design Fair value With guarantee No guarantee Matched charges

18. 2003 2004 2005 2006 2007 Timetable IAS reporting required for listed EU companies (Phase I) Exposure draft expected for Phase I Full IAS accounting for insurance? PSB live for insurers

19. Continue to use existing GAAP Assets and investment contracts under IAS 39 Elimination of catastrophe and equalisation provisions Embedded derivatives The interim solution

20. Performance linked contracts Income statement Balance sheet presentation and disclosures Market Value Margins Renewal premiums Policyholder behaviour Profit on day one The unresolved issues

21. “Market value” Independence of assets and liabilities Analysis of movement Radical Transparency Impact on the industry Summary – FRS 17 for the insurance industry?