Frings SOA Fair Value Accounting Webcast v2013-03-06
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Frings SOA Fair Value Accounting Webcast v2013-03-06

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A perspective, from a reinsurance viewpoint, on (1) sources of fair value accounting volaility and (2) solutions to reduce volatility.

A perspective, from a reinsurance viewpoint, on (1) sources of fair value accounting volaility and (2) solutions to reduce volatility.

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  • 1. Reinsurance Perspective Volatility of Fair Value Accounting Michael Frings FSA, CFA, MAAA Vice President and Senior Actuary Global Financial Solutions RGA Reinsurance Company SOA Webcast | March 13, 2013
  • 2.  Sources of Fair Value Volatility  Solutions to Reduce Volatility Presentation Topics A reinsurance perspective on ceding company fair value volatility 2
  • 3. Sources of Fair Value Volatility 3
  • 4.  Assumptions  Market inputs: interest rates, volatility, strike prices, etc.  Company inputs: policy holder behavior, mortality, morbidity, etc.  Models  Company structure  Hedging activities  Accounting Interpretations: Yesterday, Today & Tomorrow  US GAAP  US Statutory  IFRS  MCEV Reasons for Fair Value Volatility Movement due to … 4 Need to know your sources of fair value volatility
  • 5.  Income Statement  Operating Earnings (‘Core’) vs. Non-Operating Income (‘Non-Core’)  Net Income  Balance Sheet  Equity / Accumulated Other Comprehensive Income (AOCI)  Assets  Liabilities  Disclosure Only Accounting Sources of Fair Value Volatility With the geography of volatility, some places are better than others… 5 Fair value disclosed as required
  • 6.  US GAAP  ASC 820 (FAS 157) – Fair Value Measurement  ASC 815 (FAS 133/FAS 155) – Derivatives & Hedging  Guaranteed withdrawal benefits guarantees in variable & indexed annuities  Excess indexed benefits in indexed annuities  Stable value wrap contracts  Financial guarantees  DIG B36 – funds withheld coinsurance and mod-co  ASC 320 (FAS 115) Investments – Debt & Equity Securities  Designation: Trading (IS & BS effects); AFS (BS/OCI only)  Other than Temporary Impairment (IS & BS effects)  ASC 944 (FAS 97/120) – Shadow DAC Asset  ASC 825 (FAS 107/159) – Fair Value Disclosure  ASC 250 (FAS 155) – Designating Fair Value of Liabilities Accounting Sources of Fair Value Volatility Selected from common accounting pronouncements… 6
  • 7.  US Stat  SAP 43R/99 – Other Than Temporary Impairments  SAP 86 – Accounting for Derivative Instruments & Hedging Activities  SAP 100 – Fair Value Measurements  Actuarial Guidelines 35 & 43  IFRS  IAS 7 – Financial Instruments: Disclosures  IFRS 9 – Financial Instruments  IFRS 13 – Fair Value Measurement (effective 1 Jan 2013)  MCEV  Supplementary embedded value reporting for EU companies  European Embedded Value (EEV) principles and European Insurance Market Consistent Embedded Value (MCEV) principles published by CFO Forum Accounting Sources of Fair Value Volatility Selected from common accounting pronouncements… 7
  • 8. Solutions to Fair Value Volatility 8
  • 9.  Hedge, Hedge, Hedge…is there a perfect hedge?  Clearly interpret and define Fair Value  Develop fair value calculation with clear, consistent assumptions  Can explain fair value movements better to management & investors  Adopt ‘book value’ rather than ‘fair value’ approaches  Does this sweep financial issues under the rug?  Discourage risk management?  Find Another View of the Business  Another – The Another could be...  Reinsurer(s)  Buyer(s)  View – Their View could be…  Are in a different accounting regime  Likes the risk better than you What Can Insurers Do Some solutions… 9
  • 10.  Reinsure mortality/longevity risk only  Cheaper like YRT on the net amount at risk  Doesn’t address fair value issues  Coinsure business  Straight co/mod-co structures which are akin to selling the business  Funds withheld structures create US GAAP DIG B36 fair value volatility  Structure reinsurance to carve out risks  Use capital markets and reinsurance solutions to carve out market, mortality and policyholder behavior risks  Difficult to find those willing to take each of the risks…concentration of risks!  Parent of insurer may keep some risk(s) entirely or the tail risk(s) Some Reinsurance Solutions for Fair Value Risks Includes variable annuities, indexed annuities, etc… 10
  • 11.  Counter-party risk present  Complicated structured finance solutions  Volatile fair value marks unpopular with analysts  Reinsurer and ceding company have different view of risk  Draw conclusion that base contract + rider are under priced.  Real world v. risk neutral  Market capacity is low  Lack of secondary market  lack of opportunity to make money? Challenges with Reinsuring Fair Value Risk Often begin with differing views on measurement of risk… 11 Reinsurers also want profitable business, too!
  • 12. Thank you for your attention. 12