Roundtable Participants Agree: Now Is the Time to Prepare for Upcoming Regulatory Changes |
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Written by U.S. Insurance News
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Sunday, 16 March 2008 |
This is no time to play the waiting game.
That's one of the shared opinions put forth at the recent "Moving Forward in a Principles-based World" roundtable conducted by the Insurance and Actuarial Advisory Services (IAAS) practice of Ernst & Young LLP.
Participants in the roundtable discussed a number of upcoming regulatory changes that will greatly impact the practice of financial reporting. Chief financial officers, senior life insurance executives, and other roundtable members discussed new developments and implementation issues surrounding statutory principles-based reserve and capital regulations (PBR), as well as the convergence of the US Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and Solvency II.
Among participants there was an over-riding consensus that the industry is struggling to understand and prepare for the impact on the business. Even though regulations are still in flux, those in attendance agreed that companies who seek to understand the ramifications of the coming changes before their adoption will be in a better position down the road. Now is the time, participants agreed, to begin mapping out a plan for meeting the new requirements.
Tara Hansen, senior actuarial advisor with Ernst & Young LLP, listed all the areas that will demand significant alterations in processes and systems: impacting pricing and risk management, the transition to principles-based reserving and capital, and pending regulatory convergence.
"The onus is on the actuarial team to grab the reins and take action so they can proactively lead their companies through the extensive changes to come and ultimately improve risk management and enhance profitability," she said.
Key highlights from the roundtable discussion include:
- Principles-based reality is beginning to come into focus. Participants are still dealing with the aftermath of C3 Phase 2 implementation, and many admitted that PBR has only recently started to become an issue for them. The group expressed worry about being able to meet the new PBR hurdles, since there are multiple stages to putting the principles-based reserves framework in place and the standards have not yet been fully defined. Though there have been extensive drafts, the American Academy of Actuaries has not finalized its Life Reserve Work Group proposal, and participants are eager to know when the exposure drafts will be finalized.
Despite the number of questions that have yet to be answered regarding PBR, roundtable participants stressed the importance of acting now.
- The danger of addressing PBR in a vacuum; global convergence groundwork is already in place. While the timetable is uncertain, the group agreed that US GAAP rules appear set to converge with emerging fair value-based IFRS accounting rules. At the same time, the European Commission continues to move forward with Solvency II and its economic risk-based solvency requirements, which carry an implementation deadline of 2012.
Although the final outcomes of PBR, IFRS, and Solvency II are not the same, participants noted that the modeling and infrastructure changes US companies are making to prepare for PBR can serve as a foundation for the future regulatory convergence.
- Implementation challenges: consistency is the brass ring. As regulations converge, participants suggested that implementation will need to revolve around creating consistency through an integrated set of reporting processes. The top implementation concern mentioned by participants was the lack of resources to make the necessary changes, they also acknowledged that even with the right people and funding, significant issues remain, such as modeling and technology platform challenges and opportunities; the shift to stochastic processing; systems for analyzing reserve changes; and greater communication between pricing, valuation, and corporate.
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