PHILIPPE TRAINAR Ninth Annual Conference of the IAIS 8-11 October 2002, Santiago, Chile

1. PHILIPPE TRAINARNinth Annual Conference of the IAIS8-11 October 2002,Santiago, Chile PANEL ON INTERNATIONAL ACCOUNTING STANDARDS FOR INSURANCE

2. Introduction • I would like to address the complex interactions between IAS, supervisors & insurance business from an European point of view : • IAS & Insurance business : convergence, anxieties & divergences • IAS, IAIS & Insurance business : anxietes, convergence & cooperation

3. IAS & Insurance Business • Constrained exercise • Convergence • Anxieties • Divergence • Interim period • Endgame ?

4. IAS & Insurance Business • Constrained exercise for European business • something imposed to business by public authorities • very short time deadline (2005) without exemptions, except for public enterprises, mutuals & companies establishing their primary accounts in Us Gaap • decision taken without any knowledge of the exact contents & and of its economic consequences • absolutely no reflections on the art and ways to master such consequences as volatility etc...

5. IAS & Insurance Business • Convergence between IAS & insurance business • transparency, objectivity, understandability, practicality, relevance & reliability of standards • international standards, that is international comparability => easier job for multinationals • intersectoral standards, that is intersectoral comparability => reduced risk premium for insurer • defined principles, as opposed to precise rules => priority to economic substance over legal form • reference to market, that is to economic value => more coherent concept of value

6. IAS & Insurance Business • Anxieties of insurance companies about IAS • a non transparent and non foreseeable process • existing standards do not seem well adapted to insurance business because of : • long term view of most insurance activities • large flexible intertemporal mutualization between generations of contracts in many countries • asset / liability management that lies at the core of insurance business and is key for understanding accounts • unclear regulatory and fiscal consequences of the new standards for insurance companies

7. IAS & Insurance Business • Divergences between IAS & insurance business • “full fair value” can not be an implicit reference because most markets, particularly in insurance, are not continuously liquid => successful lobbying • “own credit worthiness” can not impact the measurement of insurance liabilities, because of legal constraints => successful lobbying • many European life insurance contracts falling in the scope of IAS 39 (ex : performance linked contracts) are not well treated by this norm • at minimum, IAS 39 should be completed

8. IAS & Insurance Business • Necessary interim period • current situation : no norm for insurance contract and no completed IAS 39 => it is too late for 2005 • 2 criteria for interim regime : consistency (of asset & liability accounting) & cost effectiveness • => interim propositions of the European insurers : • for liabilities : current “prudent” practices as “best” practices + elimination of non IASB compliant ones • for assets : exemption of IAS, easing of “held to maturity”, further category of asset for insurer or shadow accounting • additional disclosures of assumptions, methods, sensitivities & embedded values

9. IAS & Insurance Business • Endgame ? • general questions : how to recognize profit at inception & calculate market value margin • for life insurance => what true and fair view of unallocated surplus ? economic vs accounting view • for non life insurance => how to control entity specific assumptions ? Standardized vs specific one • general requirement : comprehensive field tests and comprehensive performance reporting • insurers have to set up reliable data, assumptions & sensitivity tests + explain volatility of results

10. IAS, IAIS & Insurance Business • Potential conflicting expectations of supervisors & insurance companies • On the background of clear converging point of views & interests • Opportunity for supervisors & business to work together

11. IAS, IAIS & Insurance Business • Potential conflicting expectations • business fears the consequences, for it, of the current developing debate on a potential opposition between true & fair accounting vs prudent one • business asks for one accounting standards when supervisors threat to impose separate regulatory & accounting standards if they are not satisfied • business asks for a complete review of “prudential” rules (solvency & asset rules) in order to tackle correctly higher volatility => also tax consequences • business fears current misunderstanding between financial & sectoral public authorities

12. IAS, IAIS & Insurance Business • Clear converging point of views & interests • both want transparent, objective, practicable, understandable, relevant, reliable & comparable standards • both want coherent standards that the best financial information on the liabilities of insurers & on the effectiveness of their ALM • both want to avoid any artificial volatility or misleading financial statements • both want to find accurate information on “prudential” provisions in excess of “best estimate” ones in the future financial statements

13. IAS, IAIS & Insurance Business • Opportunity to work together • we fully share the views expressed in the letter of Chairmans Aguilera & Roberts sent last june to sir David of IASB… except ch. 1 § 4 => a comprehensive presentation of the most sensitive issues for the insurance sector • IASB is in an educational process concerning insurance contracts => margins for constructive dialogue despite the short term deadline • at this step, past experience demonstrates that such a dialogue can produce some results

14. Suggestions for conclusion • We would probably have preferred to get a more progressive and less revolutionary international set of accounting standards. • But IASB, with the support of European Commission & Ministers of Finance, decided differently and imposed an imprudent agenda. • Regulators, supervisors & insurers should cooperate in order to get the less bad solution, an attitude that does not predetermine the final position of insurers.