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Frings SOA Fair Value Accounting Webcast v2013-03-06
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
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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 …
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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…
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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…
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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…
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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…
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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…
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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…
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Reinsurers also want profitable business, too!