■ ■ Financial reporting: Finally, how will numbers be reported?
Will the ledger change? How will updates be classified and
attributed? New accounting frameworks have an important
impact on financial reporting. We believe it is imperative to get
finance, risk, accounting, and actuarial all on the same page.
A Case Study—PBR
The previous section examined key considerations in the wake of
regulatory change but was not specific to any particular regime,
accounting basis, or rule. In this section, we attempt to provide
more color on the topics described above using PBR as an example.
This discussion is by no means exhaustive, but rather focuses on
a few important topics that we believe fit into the overall “
Future Vision/Employee Buy-In/Planning
One of the particular challenges of PBR implementation is the
decision of when to implement. The new valuation manual is ef-
fective as of January 1, 2017, but the regulation allows companies a
three-year transition period. Companies can choose to implement
the new methodology all at once, or transition product groups to
the new method one at a time, as long as all products issued after
January 1, 2020, are using a PBR valuation.
A further complication is that a new Commissioners Standard
Ordinary (CSO) mortality table has been developed, and it also
has a three-year transition rule. Companies may reprice products
to take advantage of the new 2017 CSO table, whether they move
to a PBR methodology now or not. Other companies may choose
to phase in their move to PBR—starting with term insurance, for
example, then whole life, and then universal life by 2020. Still other
companies may find it beneficial to wait until 2020 to implement
all the products at once.
The decision of when to implement is not a simple one. It will
likely depend on issues both within and outside the actuary’s
control. Below are some questions that decision-makers might
■ ■ What are the internal constraints—systems limitations, staffing
availability, and appetite for consulting expense?
Current and Future Regulatory Change
Here are some of the actuarial reporting frameworks we see changing in the next few years.
IFRS 9, Financial Instruments, includes
three main areas of impact: classification
and measurement of financial liabilities,
impairments, and hedge accounting. Key
classification item changes include Fair
Value through Other Comprehensive
Income, Available for Sale Assets, and
other accounting mismatches. The key
changes to the impairment requirements
will generally result in a number of system,
processes, governance, and credit risk
modeling needs due to the significant
impact of the rule on large portfolio commercial loans. The new hedging model
becomes less rules-based and includes
economic hedging strategies, in addition
to the increased disclosure requirements
related to hedging.
IFRS 17, Insurance Contracts, (formerly
known as IFRS 4 Phase II) is expected to
fundamentally change the way insurers
account for their insurance contract liabilities. The objective is to develop globally
consistent recognition and measurement
requirements that will provide users of financial statements with useful information
to make important strategic decisions. The
key impacts to life insurance companies
include performance reporting, accounting, best estimate assumption-setting,
specified discount rate methodology,
internal accounting system changes, and
FASB Topic 944—
This proposed accounting standards
update would require all market risk
benefits to be measured at fair value.
The original assumptions at contract
inception would no longer be locked in
(currently the case for contracts classified
under Financial Accounting Standard 60)
and must be updated at least annually,
with discount rate assumptions refreshed
at each reporting date. This proposed
update would also simplify deferred
acquisition costs (DAC) amortization by
amortizing either an amount of insurance inforce or using a straight-line
basis, rather than the current method of
amortizing in proportion to premiums,
gross profits, or gross margins. This modification would result in a more simplified
amortization calculation for companies
to maintain. The proposal includes additional disclosure requirements.
Moving to Solvency III
Solvency II went into effect on January
1, 2016. Solvency III has not yet been
proposed, but any change to Solvency
II will have significant impacts. Basel is
the equivalent regulation to Solvency in
banks, and Basel III becomes effective
January 2018 with additional requirements in its three pillars. It is likely in our
view that Solvency III will contain parallel
changes to be consistent with Basel III.
VM- 20, or Requirements for Principle-Based Reserves for Life Products,
became effective with a three-year
transition period on January 1, 2017 (all
companies subject to PBR must implement by 2020). The universal life with
secondary guarantees (ULSG) and term
insurance markets will see the largest impact of this new regulation. VM- 20 currently applies to new business only. There
have also been discussions on applying
VM- 20 across all inforce business once
all stakeholders (companies, regulators,
etc.) are comfortable with these reserves
on new business.
In light of VM- 20 for life insurance, PBR
for other products is already cresting the
horizon. VM- 21 is already effective for
variable annuities (introduced as AG- 43
in 2009) and principle-based approaches
are in the works for other lines of business as well (VM- 22 for fixed annuities,
VM- 25 for health products, and VM- 26
for credit life and disability products).
Eventually, all products are likely to
calculate reserves on principle-based
approaches to better manage solvency
for U.S. statutory purposes.