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Fair Valuation of Liabilities

  • C.J. Hairs (a1), D.J. Belsham, N.M. Bryson, C.M. George, D.J.P. Hare, D.A. Smith and S. Thompson...


A project to develop an Accounting Standard for Insurance, with the aim of enhancing understandability, relevance, reliability and comparability of general purpose financial reporting for insurance worldwide, is being progressed by the International Accounting Standards Board. The basis of the proposals is that assets and liabilities be shown at fair values (market values for quoted instruments). This paper, prepared by a Working Party established by the Life Board of the United Kingdom actuarial profession, summarises and comments upon a number of the principal features of the proposals, as they have emerged up to September 2001. The paper goes on to consider how a system of reporting for prudential regulatory purposes might be built upon a fair value general reporting base, summarising the thinking of a number of other bodies, proposing certain principles and suggesting lines of development. The appendices to the paper discuss a number of issues in further depth and present some illustrative results of some investigations into applying fair value methods in practice. The emphasis of the paper is on reporting for life assurance business, although many of the principles apply equally to general insurance.



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International Accounting Standards Committee (1999). Issues Paper: Insurance. Issues Paper website ‘{A0BC0C3E-A986–11D5-BE6B-003048110251}&n=1001#issues
A selection of responses to/comments on the Issues Paper — see below for website address, where many more can be found.
American Academy of Actuaries (2000). Comment letter 84.
European Commission (2000). Comment letter 134.
Exley, C.J., Mehta, S.J.B. & Smith, A.D. (2000). Comment letter 92.
Faculty and Institute of Actuaries (2000). Comment letter 72.
International Actuarial Association (2000a). Comments on the Issues Paper (including 10 attached papers on particular issues). Comment letter 103.
International Actuarial Association (2000b). General overview of a possible approach to insurance liabilities valuation and capital requirements. Comment letter 103.
Joint Response — Institute of Chartered Accountants in England & Wales (ICAEW), Faculty and Institute of Actuaries, Institute of Chartered Accountants Scotland (ICAS) and Association of British Insurers (UK) (2000). Comment letter 80.
International Association of Insurance Supervisors (2000). Comment letter 112. Website source of links to comment letter: ‘{A0BC0C3E-A986–11D5-BE6B-003048110251}&n=3225
Basel Committee on Banking Supervision (2001). Overview of the New Basel Capital Accord. Website link ‘
Cairns, A.J.G. (2001). From financial economics to fair valuation. Proceedings of the 11th International AFIR Colloquium, Toronto, 1, 135166. Website link ‘
Casualty Actuarial Society Task Force (2000). White paper on fair valuing property/casualty insurance liabilities. Website link ‘
Clay, G.D., Frankland, R., Horn, A.D., Hylands, J.K., Johnson, C.M., Kerry, R.A., Lister, J.R., Loseby, R.L. & Newbould, B.R. (2001). Transparent with-profits — freedom with publicity. B.A.J. 7, 365465 and 725–746.
Davies, H. (2001). Insurance Institute of London Annual Luncheon — Speech by Howard Davies. Website link ‘
Dowd, K. (1998). Beyondvalueatrisk: the new science of risk management. Wiley, New York.
Englander, S. (2000). Conceptual approach to a fair value of insurance. Private correspondence.
Financial Services Authority (2000a). A new regulator for the new millennium. FSA website.
Financial Services Authority (2000b). Some aspects of regulatory capital. FSA website.
Financial Services Authority (2000c). Building the new regulator — Progress Report 1. FSA website.
Financial Services Authority (2001a). Consultation paper 97 — integrated prudential sourcebook. FSA website.
Financial Services Authority (2001b). Individual capital ratios for banks. FSA website.
Forfar, D.O. & Masters, N.B. (1999). Developing an international accounting standard for life assurance business. B.A.J. 5, 621698.
Forfar, D.O. (2000). Comments on FASB document — statement of financial accounting concepts no 7 — using cash flow information and present value in accounting measurement. Available on request from Life Board of the Faculty and Institute of Actuaries.
Girard, L.N. (2000a). Market value of insurance liabilities and the assumption of perfect markets in valuation. North American Actuarial Journal, 4, 1.
Girard, L.N. (2000b). Market value of insurance liabilities and the assumption of perfect markets in valuation. The Fair Value of Insurance Business, Kluwer Academic Publications. 7113.
Girard, L.N. (2002). An approach to fair valuation of insurance liabilities using the firm's cost of capital. North American Actuarial Journal, 6(2), 1846.
Hare, D.J.P., Dickson, J.A., McDade, P.A.P., Morrison, D., Priestley, R.P. & Wilson, G.J. (1999). A market-based approach to pricing with-profits guarantees. B.A.J. 6, 143213 and 721–735.
Hibbert, A. J., Mowbray, P. M. & Turnbull, C. (2001). A stochastic asset model & calibration for long-term financial planning. Faculty and Institute of Actuaries website.
Hylands, J.F., Clay, G.D., Forfar, D.O., Hinton, P.H., Jenkins, J.A., & Webber, D.M. (1993). Joint Actuarial Working Party — Risk-based capital — interim report. Proceedings of 1993 life convention, ‘Life — an assured future', of the Faculty and Institute of Actuaries, 595633.
International Association of Insurance Supervisors (1999). On solvency, solvency assessments and actuarial issues. IAIS website (under Publications).
International Association of Insurance Supervisors, and others (2001). Multidisciplinary Working Group on Enhanced Disclosure, Final Report to the I AIS, BCBS, IOSCO and CGFS of the G-10 central banks. IAIS website (under Publications).
Jarvis, S., Southall, F. & Varnell, E. (2001). Modern valuation techniques. Paper presented to the Staple Inn Actuarial Society.
Joint Working Group of Standard Setters (2000). A consultation paper incorporating the JWG's draft standard. Website link:
Martin, G. & Tsui, D. (1999). Fair value liability valuations. Australian Actuarial Journal, 5, 351489.
Needleman, P.D. & Roff, T.A. (1995). Asset shares and their use in the financial management of a with-profits fund. B.A.J. 1, 603688 and 2, 5–18.
Scott, P.G., Elliott, S.F., Gray, L.J., Hewitson, T.W., Lechmere, D.J., Lewis, D., & Needleman, P.D. (1996). An alternative to the net premium valuation method for statutory reporting. B.A.J. 2, 527621.
Urmston, M.N., Black, A.G., Chadburn, R.G., Chamberlain, A.J.M., Frankland, R., King, R.W., Sheard, J.M. & Orton, T.R. (2000). Resilience Reserves Working Party Report. Faculty and Institute of Actuaries website under Library & Publications → Conferences → 2000 Life Convention.
Wright, P.W., Burgess, S.J., Chadburn, R.G., Chamberlain, A.J.M., Frankland, R., Gill, J.E., Lechmere, D.J. & Margutti, S.F. (1998). A review of the statutory valuation of long-term insurance business in the United Kingdom. B.A.J. 4, 803864 and 1029–1058.


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Fair Valuation of Liabilities

  • C.J. Hairs (a1), D.J. Belsham, N.M. Bryson, C.M. George, D.J.P. Hare, D.A. Smith and S. Thompson...


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