IFRS Insurance Reporting - Beyond Transition E Q. Suggestions for improvements to industry presentation and disclosures

Transcription

1 Assurance and Advisory Business Services International Financial Reporting Standards E Q IFRS Insurance Reporting - Beyond Transition Suggestions for improvements to industry presentation and disclosures

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3 c o n t e n t s Contents Section Topic Page Introduction and summary 2 The impact of IFRS on insurance accounting 3 Financial statement presentation 0 Enhancing disclosures Closing observations 33 Appendices A Some accounting features specific to the insurance industry 35 B Sensitivity disclosures 3 C Companies included in the analysis 3 D Glossary of terms 0 E Ernst & Young insurance contacts 2 Ernst & Young believes the insurance industry should be signalling to standard setters the presentation and disclosures it believes would improve users understanding of insurance activities

4 I n t r o d u c t i o n and summary 1 Introduction and summary Investors, shareholders and other users of insurers financial statements need more understandable, comparable and relevant information. Dr Helmut Perlet, Chief Financial Officer of Allianz Group, June 2006 Source: CFO Forum This publication presents the results of an analysis of the 2005 financial statements of 18 insurance companies reporting under International Financial Reporting Standards (IFRS). It makes some presentation and disclosure recommendations that we believe will improve the overall comparability and decision-usefulness of insurers financial reporting. For many insurers, 2005 was the first year of reporting under IFRS. It was clear from our analysis that a large amount of time and effort went into the preparation of these financial statements. Complying with all the new requirements in time to meet reporting deadlines was, in our view, an outstanding achievement. However, all this effort resulted in documents which, by their size and complexity, are difficult to understand. Moving forward, we expect insurance companies to focus their attention on providing information that will enable readers to compare insurance companies more effectively. Unfortunately the introduction of IFRS has not reduced the complexity inherent in insurance accounting. Acknowledging that the development and adoption of a comprehensive financial reporting standard for insurance contracts is a long way off, we believe that insurers who will be reporting under IFRS in the next couple of years could make some relatively straightforward changes to their presentation and disclosures that, in our view, would go some way to reducing the divergence in current reporting practice. Insurance accounting is not well understood, even by many professional analysts. The insurance accounting process is regarded by many as a black box because financial statements have generally not provided information of an appropriate nature, or in an appropriate form, to enable users of financial statements to readily identify the drivers of value in the business. In addition to the inherent complexity of the products underlying the insurance operations that are reflected in financial statements, difficulties in extracting decision-useful information from the financial statements of international insurance groups have historically been compounded by the industry practice of aggregating insurance liabilities measured according to different local regulatory requirements and/or local practices. This has not changed with the introduction of IFRS 4 Insurance Contracts since insurers are permitted to continue previous accounting policies for insurance liabilities. Indeed, as we discuss in this publication, the use of certain accounting options introduced by IFRS 4 has made insurance contract accounting even more complicated. In a complex accounting environment, where there is little consistency in recognition and measurement practices, we believe comprehensive and consistent presentation and disclosure becomes particularly important. The International Accounting Standards Board (IASB) effectively recognised this when they developed the extensive implementation guidance to IFRS 4 which contains many disclosure suggestions to support the guidance in IAS 1 Presentation of Financial Statements. Since the IASB in Phase II does not intend to address presentation and disclosure requirements until important decisions on recognition and measurement have been made, users of financial statements will not be well served for some time to come. We do not believe it makes sense to wait this long to achieve improved presentation and disclosure so that investors can better understand the nature of the risks

5 I n t r o d u c t i o n and summary and opportunities faced by insurance companies and are better able to evaluate their relative performance and financial positions. Anecdotal evidence indicates that non-gaap sources of information, such as embedded value (EV) reports, are viewed by many readers as more informative than the IFRS-based financial statements themselves. This is a sad indictment of the decision-usefulness of the financial statements currently being issued. We believe that some features of these EV reports hold the key to improving users understanding of what is happening within an insurance company. This publication makes some recommendations along these lines. We believe there is considerable scope for standardising the presentation of various components of insurance company balance sheets and income statements. We also believe the insurance industry should explain to the IASB why certain presentation formats are more useful than others, and demonstrate their support for greater consistency and comparability by reflecting them in the IFRS financial statements they prepare. Our suggestions for improved disclosures stem from a similar thought process. We see three areas where straightforward, but significant enhancements can be made. All of them are based on realigning information and formats found in the 2005 IFRS-based financial statements we reviewed, and when appropriate, linking them with other information that is often published by insurance companies, such as EV reports. The three areas of disclosure on which we would like to see the industry build consensus are: Insurance risk disclosures. These disclosures are vitally important because they provide information to users about the business of an insurer, and how well it manages the risks that it assumes. The main disclosures in this area are insurance sensitivities and the maturities of assets and liabilities. An analysis of the maturity dates of financial assets and liabilities helps users to understand the risks associated with asset and liability settlement and therefore the uncertainties surrounding the amount and timing of the insurers future cash flows. Our analysis indicated that sensitivity disclosures vital to insurance are found in different places throughout financial statements, as well as in the management discussion of results for the year and in EV reports. We believe it would be helpful if sensitivity disclosures vital to insurance were to be combined and presented together so that the effects of changes in assumptions on liabilities, equity and income can more easily be seen. We also recommend that insurers should provide consistent analyses of both asset and liability maturities. Liability roll-forward schedules. Roll-forward schedules are a key source of information about the factors influencing the measurement of an insurer s obligations to policyholders. Insurance liabilities are among the most material items on insurance company balance sheets and thus information about the development of insurance liabilities is important in evaluating the amounts, timing and uncertainty of future cash flows. Since the measurement of these liabilities involves significant estimation and uncertainty as well as a variety of different measurement bases, we believe that users should be given more information about the sources of change during the period. We recommend that insurers take a more structured approach to the presentation of their liability roll-forward schedules, explaining the elements of movements in liabilities due to cash flows, experience adjustments and changes in assumptions. Claims development tables. These tables provide information about variances between management s previous estimates and the final cost of settling the claims. As such, they provide an indication of the reliability of these (often highly complex) estimates. Claims development tables convey valuable information about how accurate management s prior estimates were, and the extent to which insurance contract liabilities are subject to variation.

6 I n t r o d u c t i o n and summary Our recommendation is that insurance companies should provide more narrative discussion to explain the amounts presented in their claims development tables, especially in cases where the tables show large differences between estimates made and the ultimate cost of settling claims. We also recommend that insurers consider presenting separate tables for their long- and short-tail businesses. Improving financial reporting in the insurance industry is challenging because a transparent picture for the user must be built while the requirements of IFRS and regulators are taken into account. For example, if risk-based disclosures are based on EV rather than IFRS information it is necessary to consider how best to present the information. It is also important to ensure that the improvements made align with other significant reporting developments. There are currently three important dimensions to consider: the adoption of IFRS 7 Financial Instruments: Disclosures (effective for years beginning 1 January 2007); regulatory developments (especially Solvency II public disclosure requirements in Europe); and the development of a new international insurance standard to replace IFRS 4 under Phase II of the IASB s insurance accounting project. In conclusion, we observe that more disclosure on its own does not necessarily result in the provision of better information that is useful in making economic decisions. Based on what we have seen in 2005 financial statements, if insurance companies were to place more emphasis on identifying the areas which are subject to assumptions and significant management judgement, explaining the basis for these assumptions, and discussing how actual performance has deviated from expectations, we believe there would be a significant improvement in the decision-usefulness of the financial statements produced by the industry.

7 T h e impa c t of IFRS on insurance a c c o u n t i n g 2 The impact of IFRS on insurance accounting 2.1 Background IFRS 4 was one of the last standards to be issued by the IASB in creating its so-called stable platform of standards for Recognising the difficulty inherent in formulating a high quality global standard for insurance contracts, the IASB split the insurance accounting project in two phases. Phase I made limited improvements to current accounting and resulted in an interim standard. A Discussion Paper containing the current views of the IASB regarding Phase II, and items open to discussion, is due to be published in the first quarter of The IASB s intention is that the Discussion Paper will lead to an Exposure Draft in 2008 and, eventually, to a new insurance accounting standard that is expected to be effective from about One of the most persuasive arguments for the adoption of IFRS throughout the world was that it would improve comparability between different reporting entities. To date this has not been the case for insurance companies. Indeed, the adoption of IFRS has heightened awareness of the lack of comparability and consistency of financial statements within the industry. This is largely because IFRS 4 still allows companies to continue to apply their previous GAAP accounting policies for the recognition and measurement of insurance contract assets and liabilities. This means that the accounting policies used by an insurance company under IFRS are influenced heavily by the requirements of its previous GAAP. In addition, when an international insurance group reports a particular insurance contract line item (eg deferred acquisition costs) in its balance sheet, different recognition and measurement bases may have been used to determine the amount reported because IFRS 4 permits the consolidation of amounts determined under different previous GAAPs. 2.2 Insurance accounting today Insurance accounting is complex. Indeed the complexity that surrounds the compilation of financial statements of insurers has resulted in the industry s accounting practices being regarded as a black box to be worked around rather than worked with. This perception has forced investors and analysts to look for other sources of information to understand the financial performance and position of insurers. This point is well illustrated by the following recent comment reported in the British press. On the 24th of July 2006, the Financial Times (FT) reported an interesting exchange at the 2006 Prudential annual general meeting. A shareholder asked Chairman Sir David Clementi if there was any difference between the hypothetical future accounting employed by Enron and accounting for insurance contracts. The FT quotes Sir David s response as I have to say I very much regret your reference in the context of the Prudential AGM, however he acknowledged that there was a serious question about the accounting system we use. Source: Financial Times, 24 July 2006 While the implication in the shareholder s question was unfair to Prudential, it does highlight the fact that insurance accounting is extremely complex and very often not understood. This complexity and lack of understanding comes at a price, with industry executives believing that investors and analysts apply an accounting discount to the

8 t h e impa c t of ifrs on insurance A c c o u n t i n g insurance industry which increases its cost of capital. the insurance industry is one of the few industries still applying a patchwork of different and unsatisfactory accounting principles. These result in financial statements that are a hindrance rather than a help to comparing financial positions with companies in other sectors and even between two insurers. This ultimately penalises consumers by limiting insurers ability to compete and requiring them to pay a higher price for capital than would be the case with better financial reporting. Press release from the CFO Forum 1 22 June 2006 on the cost of capital disadvantages facing insurers The insurance industry focuses on managing assets and liabilities on an economic basis, something which its accounting practices often do not reflect. The application of IFRS can result in a significant accounting mismatch between assets and liabilities when there is little or no economic mismatch (see Section 4.2.4). Conversely, a significant economic mismatch, for example between the duration of assets and liabilities, might exist that is not apparent from the financial statements due to the accounting policies selected by an insurance company. The accounting mismatch mentioned above arises when, partly for regulatory reasons, large insurance liabilities are measured at cost, while the related investments are measured at fair value. The IASB provided in IFRS 4 a number of ways for insurers to mitigate the effects of this mismatch. Two of these concessions are the ability to re-measure some designated insurance contracts at current interest rates and the ability to use shadow accounting 2. In 2005 insurers made only limited use of the first option. Only three companies in our sample disclosed they had changed their accounting policies to remeasure certain liabilities at current rates. However, most companies in our sample group did apply shadow accounting. 2.3 Some options for the future Unfortunately, until Phase II is completed, little can be done to improve consistency in recognition and measurement within the industry. In our view, the only way forward in the foreseeable future is to improve disclosures in the financial statements. This was noted by the Geneva Association: ii. The way forward [... ] flexibility in reporting would not undermine the ability of the main users of financial statements to make consistent comparisons between insurance companies, providing there is adequate disclosure of relevant information in the notes to the accounts or in supplementary financial statements. The search for an international accounting standard for insurance - The Geneva Association 3 February 2003, page 13 The IASB s Guidance on implementing IFRS 4 has helped to promote greater consistency in financial statement presentation and disclosure within the insurance industry. It contains 1 The CFO Forum was formed in 2002 as a high level discussion group made up of the Chief Financial Officers of 20 major European insurers. Members of the CFO Forum are: AEGON, Allianz, Generali, AA, Aviva, CHP, Fortis, Skandia, Hannover Re, ING, Legal & General, Munich Re, Old Mutual, Prudential, Scottish Widows, Standard Life, Swiss Re, Winterthur and Zurich. See their website: 2 Both are explained in more detail in Appendix A Some accounting features specific to the insurance industry. 3 The Geneva Association researches the economic importance of insurance activities in major sectors of the global economy. Membership includes some 80 Chief Executive Officers of the major insurance companies around the world. 8

9 T h e impa c t of IFRS on insurance a c c o u n t i n g sections on the explanation of accounting policies, (changes in) recognised amounts, (changes in) assumptions and estimation uncertainty, as well as suggestions for disclosures on the nature and extent of risks arising from insurance contracts. In the following sections we comment briefly on the approaches to presentation and disclosure applied by our sample of companies in their 2005 financial statements. Based on these observations, we offer some suggestions to improve the decision-usefulness of the information that might be presented and disclosed in future financial statements. Financial reporting involves a trade-off between the level of detail and amount of information provided on the one hand, and clarity of communication on the other. Clear and concise reports do not necessarily score highly on technical detail and discussion and this was borne out in our analysis results. However, the approaches used by some of the companies in our sample were particularly informative and, in our view, should be more widely applied. Some of them are reproduced below as illustrations of good practice, while others are reflected in the presentation and disclosure recommendations we have developed. Our view is that because there is such inconsistency in recognition and measurement among companies, insurers need to provide more information on the following three elements: the assumptions used to generate the amounts presented; the sensitivity of reported amounts to changes in those assumptions; the extent to which actual experience differs from expectations, and why.

10 SF ei nc at ni oc n i aor l stat Chapter e m e n t Tpresentat i t l e i o n 3 Financial Heading statement Ut wisi ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat. Duis autem vel eum iriure dolor in hendrerit in vulputate velit esse molestie consequat, vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit praesent luptatum zzril Source presentation Sub Heading Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea consequat. Lorem The observations ipsum dolor and sit suggestions amet, consectetuer in this publication adipisvolutpat. are based Ut wisi on enim a review ad minim of the veniam, 2005 quis annual nostrud financial exerci statements tation ullamcorper of 18 insurers suscipit reporting lobortis under nisl IFRS. ut aliquip This ex sample ea consequat. included Lorem three bancassurers, ipsvolutpat. Ut two wisi reinsurance enim ad minim entities veniam, and thirteen quis nostrud life and exerci non-life tation insurers. ullamcorper Of the suscipit entities lobortis included, nisl five ut were aliquip based ex ea in consequat. the UK, eleven Lorem in ipsvolutpat. Continental Ut Europe, wisi enim one in ad South minim veniam, Africa 4 quis and one ud exerci in Australia. tation ullamcorper Only publicly suscipit available lobortis information nisl ut aliquip was used ex ea in consequat. the survey. Lorem A list of ipsum the 18 dolor companies sit amet, making consectetuer up our adipisvolutpat. sample can be Ut found wisi in enim Appendix ad minim C. veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea consequat. Lorem ipsvolutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea consequat. Lorem ipsvolutpat. Ut wisi enim ad minim 3.1 The bigger picture veniam, quis nostrud exerci A significant observation from our analysis of 2005 financial statements is that very Lorem few insurance ipsum dolor groups sit fundamentally amet, consectetuer re-engineered adipiscing their elit, financial sed diam statements nonummy when nibh euismod they tincidunt transitioned ut laoreet to IFRS. dolore Consistent magna with aliquam other erat industries, volutpat. a strong Ut wisi national enim ad GAAP minim heritage veniam, quis remains nostrud in the presentation of their primary financial statements (ie formats of balance sheets and income statements) and in the order that their note disclosures were made. There was a notable increase in the extent of narrative disclosures and, as predicted, a number of new disclosures were made in compliance with IFRS requirements. However, some of them appear to have been drafted simply with a view to meeting the minimum Sub disclosure Heading requirements under IFRS, rather than providing useful insight as to where value in their insurance business was being created and how the risks were being managed. Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt A number ut of laoreet insurers dolore also provided magna aliquam disclosures erat that volutpat. were not Ut wisi based enim on IFRS ad minim measures veniam, but on quis other nostrud measurement exerci bases tation such ullamcorper as embedded suscipit value lobortis (EV). nisl However, ut aliquip there ex was ea consequat. little consistency Lorem between ipsum the different dolor sit sets amet, of EV consectetuer information adipisvolutpat. that were provided Ut wisi in the enim annual ad minim reports. veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea consequat. Lorem The manner ipsvolutpat. in which Ut the wisi balance enim ad sheet minim and veniam, income statement quis nostrud were exerci presented, tation ullamcorper and also the suscipit measurement lobortis bases nisl applied, ut aliquip tended ex ea to consequat. vary depending Lorem on ipsvolutpat. the country Ut in wisi which enim the ad insurer minim veniam, is headquartered. quis ud exerci We noted tation a distinct ullamcorper split suscipit in our sample lobortis between nisl ut UK, aliquip Australian ex ea consequat. and Lorem South African ipsum dolor insurers sit amet, on the consectetuer one hand, and adipisvolutpat. those from Continental Ut wisi enim Europe ad minim on the veniam, other. quis There nostrud were marked exerci tation differences ullamcorper between suscipit the two lobortis groups. nisl This ut meant aliquip that ex ea someone consequat. from a Lorem Continental ipsvolutpat. European Ut country wisi enim would ad minim potentially veniam, be able quis to nostrud interpret exerci the tation financial ullamcorper statements suscipit of an insurer lobortis from nisl another ut aliquip Continental ex ea consequat. European Lorem country ipsvolutpat. far more easily Ut wisi than enim someone ad minim veniam, from the quis UK, nostrud Australia exerci or South Africa. The differences we observed extended not only to disclosure and presentation, but also to the historical measurement bases which IFRS 4 Lorem allows companies ipsum dolor to sit carry amet, over consectetuer into their IFRS adipiscing financial elit, statements. sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud 4 Old Mutual has, for the purpose of this analysis, been classified as an insurer based in the United Kingdom. 10

11 F i n a n c i a l stat e m e n t presentat i o n 3.2 Presentation in the balance sheet and income statement Insurers in Europe were generally required under their previous GAAP reporting regimes to prepare their financial statements, and in particular their balance sheets and income statements, in accordance with prescribed formats. These formats are generally no longer used for IFRS reporting (except in France and Italy where regulatory presentational requirements do currently extend to the financial statements). This meant that companies were more or less free to create their own formats for reporting within the guidelines of IFRS. Many insurers retained previous formats as far as possible with adjustments only being made to comply with specific IFRS reporting requirements. The general freedom provided by IFRS resulted in significant variations in the appearance of IFRS balance sheets and income statements. The tables that follow show different descriptions adopted for financial assets, and insurance and investment liabilities on the face of the balance sheet. Table 1 shows the variety of approaches adopted to the presentation of financial assets on the face of the balance sheets of the sample group. Insurers may choose between presenting their investments based on the measurement categories of IAS 39 Financial Instruments: Recognition and Measurement, according to the type of investment, or in one single line. There were also variations within each of these options. FINANCIAL ASSETS PRESENTATION Allianz ING Fortis AA Swiss Life L&G Old Mutual Generali Zurich SCOR AEGON RSA Aviva AMP Prudential KBC MUNICH RE SANLAM IAS 39 CATEGORIES Financial assets at fair value through P&L Trading assets Financial assets held to maturity Financial assets available for sale Loans and receivables TYPE OF FINANCIAL ASSET Debt securities Equity securities Property securities Deposits/ short term securities Derivatives Non-trading derivatives Financial assets pledged as collateral Other investments/ financial assets UNIT-LINKED Investments for account of policyholders Unit-linked investments Assets backing contracts where financial risk is borne by policyholders PRESENTED AS TOTALS ON B/S Investments Financial investments/ assets Table 1 - Different captions used for presentation of financial assets In constructing Table 1 we reduced the apparent diversity somewhat by grouping items with different names together when it was clear that they were describing the same thing. This has made the differences appear less pronounced than they actually are, but it was necessary to make the table readable because there were almost as many different names for the same line item as there were companies in our sample. The order in which companies are listed in the table was adopted in an attempt to group similar presentations together to make it easier to analyse the choices made. 11

12 F i n a n c i a l stat e m e n t presentat i o n Table 2 looks at the presentational choices made for investment and insurance contract liabilities on the face of the balance sheet. Again, the divergence in practice among the 18 companies is apparent. Three insurers disclosed investment and insurance liabilities in a single line on the face of the balance sheet. Others split contracts into investment and insurance liabilities and made a distinction between those with, and those without, discretionary participation features. Again, for clarity of presentation, we had to simplify the actual picture somewhat. INSURANCE AND INVESTMENT CONTRACT LIABILITIES Allianz ING Fortis AA Swiss Life L&G Old Mutual Generali Zurich SCOR AEGON RSA Aviva AMP Prudential KBC MUNICH RE SANLAM INSURANCE AND INVESTMENT LIABILITIES Outstanding claims liabilities (non-life) Life insurance contract liabilities Liability for insurance contracts Liability for investment contracts Provision for future policy benefits Liabilities fair valued through the income statement (including investment contract liabilities) DPF WITHIN INSURANCE AND INVESTMENT LIABILITIES Insurance contract liabilities with DPF Insurance contract liabilities without DPF Investment contracts with DPF Non participating investment contracts Discretionary participation feature (DPF) liabilities Unallocated surplus UNIT-LINKED LIABILITIES Liabilities arising from insurance contracts where financial risk is borne by policyholders Liabilities arising from investment contracts where financial risk is borne by policyholders External unit-holder's liabilities NO BREAKDOWN ON FACE OF B/S Liabilities arising from insurance and investment contracts Table 2 - Different captions used for presentation of insurance and investment contract liabilities There were other choices reflected in the balance sheets of the insurance companies we reviewed. Some of these are listed in Table 3. The results suggest to us that it may be possible to achieve consensus within the industry on a preferred presentation. Reporting items Presentation Percentage 5 Deferred Acquisition Costs (DAC) Investment contracts with DPF Comparatives DAC shown as part of Other Assets on face of B/S DAC shown as a separate line item on face of B/S DAC shown as part of Intangible assets on face of B/S Investment contracts with DPF shown as a liability Investment contracts with DPF shown as partly equity/partly liability Comparatives restated for IFRS 4/IAS 39 Comparatives not restated for IFRS 4/IAS 39 Table 3 Balance sheet presentation options used by companies in our sample 13% 68% 19% 82% 18% 83% 17% 5 5 Where a category was not applicable to all the 18 companies in our sample, companies to which that category did not apply were excluded in calculating the percentage presented. 12

13 F i n a n c i a l stat e m e n t presentat i o n Table 4 illustrates divergence in industry specific disclosures appearing in the income statements of insurance companies we sampled. The percentages noted provide a broad indication of the extent to which a particular presentation option was favoured by insurers, and as we noted above with the balance sheets of insurers, it seems to us that it may be possible to build some consensus within the industry as how best to choose between alternatives. Reporting items Presentation 5 Percentage Outward reinsurance Reinsurance outward shown as negative revenue 67% premiums Reinsurance outward shown as expense 33% Comparatives Comparatives restated for IFRS 4/IAS 39 Comparatives not restated for IFRS 4/IAS 39 Table 4 Income statement presentation options used by companies in our sample 3.3 Some suggestions We believe that in order to enhance the ability of users from different parts of the world to understand and compare IFRS-based financial statements, insurers should make greater use of peer group comparison, and should co-operate in efforts to reduce the divergence in presentation. This might start with key players in the industry that have adopted IFRS agreeing informally to use a common set of terms and formats in their financial statements. Outlined below are some quick win changes that we believe insurers could make, without too much time and effort, to improve the decision-usefulness of their financial statements Improve navigation We saw some helpful techniques being used by insurers to assist users in finding their way around the financial statements. Based on examples found in our analysis, we would make the following suggestions: A detailed index at the front of the annual report is helpful. The index should list every note to the financial statements together with any non-gaap sources of information referred to in the financial statements such as EV reports. Prior to the introduction of IFRS, cross-referencing from the primary financial statements was generally a straightforward matter. However, some of the notes are now so long we believe they need to be broken up into subsections, with page numbers added, to help readers find the information in a complex set of financial statements more easily Terminology and abbreviations We found that insurers frequently use different terminology in their financial statements to describe the same item. This adds unnecessary complication and sometimes causes confusion. One of the most noticeable examples is the present value of acquired insurance business profits. This item is variously described as: value of business acquired (VOBA), present value of in-force business (PVIF), acquired value of in-force business (AVIF), present value of future profits (PVFP), value of purchased business in-force (VIF), value of business in-force (VBI), present value profits (PVP), purchased interest in long term business and intangible insurance asset. Some of these terms are also used in different contexts (eg PVFP is also used to designate a component of embedded value). We believe it would help a wider group of users if consistent insurance terminology were to be used by all insurers. 83% 17% 5 Where a category was not applicable to all the 18 companies in our sample, companies to which that category did not apply were excluded in calculating the percentage presented. 13

14 F i n a n c i a l stat e m e n t presentat i o n A number of companies use the term reserve when they refer to insurance contract liabilities. The term reserve is not used in IFRS to describe liabilities and we believe it would make sense for insurers reporting under IFRS to use the term liabilities rather than reserve. Making this change would then help avoid any confusion when reference was made to movements in equity reserves. The use of abbreviations and specialised technical terms is not limited to the insurance industry. However, they are used extensively in insurance company financial statements and this does add to the confusion some users must experience. Some terms might be wellknown locally by the insurance industry, but internationally this is not necessarily the case. Companies may wish to consider setting aside the terminology they have historically used in the interest of improved understanding and comparability. The inclusion of a glossary of terms is also helpful. 3.4 Next steps European insurers are already working together on accounting issues through the CFO Forum, enabling them to engage with the IASB in a more effective way. Our suggestion is that this body now works with other international insurance organisations to help develop and promote a more consistent approach to the presentation of information in primary financial statements and to adopt, to the greatest extent possible, common terminology. We suggest that a recommended format for the balance sheet and income statement for insurers be developed through discussion at industry roundtables and the like. If a sufficient number of insurers were to reach consensus on a favoured presentation basis that is in line with the recognition and measurement principles of IFRS, this should influence the IASB s consideration of the disclosures required in Phase II. 14

15 E n h a n c i n g disclosures 4 Enhancing disclosures 4.1 Drivers of value The notes to the financial statements can play a very important role in signalling where value is created within an organisation. In the case of the insurance industry, the importance of the note disclosures is further increased by the diversity of accounting policies that are currently being applied in the industry. As mentioned in section 2, we believe that there are three key elements which assist comparison and analysis: the assumptions used to generate the numbers presented; the sensitivity of reported amounts to changes in those assumptions; the extent to which actual experience differs from expectations, and why. In this section we comment on the way insurers in our sample reported on each of these key elements and we provide some presentation and disclosure recommendations. Section 4.2 focuses on the first two elements. The third element is addressed in section 4.3 for life insurance (liability roll-forward schedules) and also in section 4.4 for non-life insurance (claims development tables). 4.2 Insurance risk disclosures The adoption of IFRS has increased the requirement for insurers to disclose risk management information not only in respect of insurance contracts, but across their entire business. The disclosure requirements in IFRS 4 regarding insurance risk are extensive, although expressed in broad terms. As a result, a wide range of information was provided in the 2005 reports we sampled, both in the management discussion section of the annual report, and in the financial statements themselves. Some insurance groups provided detailed risk information at a product level, including quantitative information, while others provided only qualitative information at a group level. With the implementation of IFRS 7 acting as a catalyst, we anticipate that risk management disclosures will evolve and converge over time. In considering how information should be disclosed to enable financial statement users to evaluate the nature and extent of risks arising from insurance contracts, we emphasise in the following sections: the importance of having some common sensitivity analysis parameters (section 4.2.1); the need to ensure that the relationship between EV and IFRS is clearly understood (section 4.2.2); the need for proper disclosure of significant potential costs relating to financial options and guarantees (section 4.2.3); and the need to highlight mismatches through appropriate asset and liability maturity schedules (section 4.2.4). 15

16 e n h A n c i n g disclosures Reporting sensitivities under IFRS IFRS 4 requires insurers to disclose the sensitivity of reported profit or loss and equity to changes in variables that have a material effect on them 6. This information can be qualitative, but should preferably also include quantitative disclosures. IFRS 7, which will come into effect for all insurers for annual periods beginning on or after 1 January 2007, will require reporting entities to disclose risk information and sensitivities to market risk as seen through the eyes of management. The amendments made to IFRS 4 as a consequence of IFRS 7 explicitly allow insurers to disclose sensitivity using EV information, if management uses that information to manage risk. For this reason we expect that more sensitivity information (currently provided in management s discussion on the operating results for the year and in EV reports) will be included in 2007 financial statements 7. We believe that the insurance industry needs to explain carefully its embedded value disclosures so that the similarities and differences of sensitivity parameters for IFRS and EV amounts can be better understood. IFRS 7 requires entities to disclose information about their exposure to risks that is based on the information provided internally to key management personnel. As a consequence of IFRS 7, IFRS 4 was amended. The main changes are: Maturity analyses for recognised insurance liabilities can be based on the estimated timing of net cash outflows (previously required a contractual timing basis) IFRS 4.39(d)(i). Sensitivity analyses, including insurance risk sensitivities, can be based on EV (or alternative methods such as economic capital), as long as the objectives, assumptions, parameters and limitations of the approach are disclosed, along with an explanation of the method used IFRS 4.39(c) and 4.39A(a). Entities have the option of presenting qualitative insurance risk sensitivity analyses rather than the quantitative analyses referred to above, provided that information is disclosed about the terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows IFRS 4.39A(b). In our sample we noted that the sensitivity information presented related mostly to life insurance business. There was very little disclosure about the sensitivities relating to nonlife business. Life insurance does have a larger number of variables that impact the amount, timing and uncertainty of future cash flows. However, as the following extracts from Aviva and Legal & General show, it is also possible to present quantitative sensitivities for nonlife (or general) insurance business. 6 Paragraph 39A of IFRS 4. 7 Sensitivities are complex and presenting the outcome of a test in the form of a number does not necessarily provide optimal information. A few of the companies in our analysis stressed the limitations of sensitivity testing as part of their disclosures.

17 e n h A n c i n g disclosures The sensitivity to a 5% increase in gross loss ratios is the same both net and gross of reinsurance because this increase does not result in any material excess of loss reinsurance limits being reached. For general insurance, the impact of the expense sensitivity on profit also includes the increase in on-going administration expenses, in addition to the increase in the claims handling expense provision. Illustration of a quantitative sensitivity analysis relating to non life insurance Aviva, 2005, Note 50, page 187 Illustration of a quantitative sensitivity analysis relating to non life business Legal & General, 2005, Note 3, page 73 Sensitivity information was disclosed in many different ways in 2005 annual reports with no two companies being directly comparable in every respect. Some insurers in our sample provided EV sensitivity information in their management discussion of the activities for the year while others did so in their financial statements. When EV information was presented outside the financial statements, it was rarely audited 8. Going forward it will be interesting to see how and where EV information will be presented in financial statements, especially when IFRS 7 becomes effective. Our view is that it would be helpful if all the sensitivity information provided by an insurer were to be combined and presented together. Disclosing the information in this way would make it far easier for the reader to see the effects of changes in those factors which impact liabilities, equity and income. As part of our survey, we looked to compare the quantitative sensitivity analyses provided by seven insurers in their financial statements, management discussion or EV reports 9. From our analysis of quantitative sensitivity information we note the following: Every company made some sensitivity disclosures that were not made by any of the other companies in our sample. 8 We note however that EV information presented by UK insurers is usually published as part of the report containing the financial statements. This information is subject to audit, but a separate auditors opinion is issued on the supplementary EV information. 9 As shown in Appendix B, the companies whose Embedded Value reports we studied were AEGON, Allianz, Aviva, AA, ING, Prudential and Zurich.

18 E n h a n c i n g disclosures Some of the sensitivity descriptions appeared to be similar, but from the explanation given they could mean different things. For example, is a parallel shift in risk-free interest the same as a shift in risk-free yield curve ; or are changes in mortality and morbidity and worsening demography similar? Different sets and different levels of sensitivity are being provided by companies. Three of the seven companies we reviewed in our EV survey made some quantitative sensitivity disclosures in their financial statements that were not included in either their EV reports or management discussion. Appendix B provides a more detailed analysis of similarities and differences we found in sensitivity information reported for a number of areas specific to insurance Clearly indicating the relationship between EV and amounts reported in financial statements Embedded value is recognised as being the present value of the future cash flows, arising from existing insurance contracts, that will be distributable to shareholders. It is our impression that certain users of insurers financial information, especially financial analysts, consider EV information to be more relevant than accounting-based information. Insurance companies are responding to this by publishing separate EV reports, but also by including EV numbers in their financial statements and/or their management discussion. Detailed information about the development of EV is useful to the users of financial statements as it provides insights into the aspects of the business that affect its overall value. EV consists of various components. A typical analysis of EV would recognise the following three elements: 1. A Free Surplus 10 allocated to the Covered Business 11, together with a Required Capital 12 amount to support the Covered Business, the total of the two being referred to as the Adjusted Net Asset Value (ANAV) or a similar name The present value of future shareholder cash flows from in-force covered business. (The Value of In Force or VIF). 3. A deduction for the cost of holding Required Capital. The Value of In Force represents, in practical terms, the insurer s inventory of future profits that are embedded in the current portfolio of insurance contracts. On the other hand, Adjusted Net Asset Value (ANAV), the first element of EV mentioned above, represents profits that have already emerged. As such, ANAV is the element of EV most closely linked to IFRS equity because it relates to that part of EV that has been recognised in the financial statements. Future profits (VIF) will not have been recognised in the financial statements, unless these were paid for when acquiring a portfolio. (See the discussion of the Value Of Business Acquired (VOBA) below). Insurers regard it as appropriate to provide explanations of how the EV information aligns with IFRS information reported in the financial statements. The reconciliations are sometimes complex, but as illustrated below, we believe some insurers do this quite well. 10 Free Surplus is the amount of any capital and surplus allocated, but not required, to support the in-force business. 11 Covered Business relates to the insurer s business that is included in the embedded value estimate. In most cases, this is the life business. The European Embedded Value Principles (CFO Forum) require that covered business is clearly identified so that what is included in the EV reports and what is not, is clearly understood. 12 Required Capital is the amount of assets, over and above the value placed on liabilities in respect of covered business, whose distribution to shareholders is restricted. 13 A commonly used term is net worth. 18

19 E n h a n c i n g disclosures Differences between IFRS equity and ANAV arise from the different bases for recognition and measurement. Two frequently occurring differences between ANAV and IFRS equity are adjustments for deferred acquisition costs (DAC) and the value of business acquired (VOBA). This is because in calculating EV; DAC and VOBA are part of the second element mentioned, the present value of future cash flows. In our sample we noted differences in the way companies presented their reconciliations of EV to IFRS, as well as the IFRS balances to which the embedded values were reconciled. The extract below shows the reconciliation that was presented by Aviva. It distinguishes life business from non-life and describes the allocation of EEV to the various stakeholders in the business. Principles for a common measure of EV were published by the CFO Forum in May The common measure is referred to as European Embedded Value (EEV). This has been adopted and disclosed by many insurers. llustration of the relationship between IFRS Equity and EEV - Aviva, 2005 EEV report, page 203 (2004 amounts and note 3 on pension scheme deleted for clarity) 19

20 e n h A n c i n g disclosures The reconciliation presented by Prudential is also, in our view, helpful to readers, although the different forms of presentation used by Aviva and Prudential illustrate the diversity of disclosure practice in the industry. IFRS equity versus European embedded value (EEV) Prudential, 2005 EEV report, Note 14, page 224 The table above links Statutory IFRS basis shareholders funds to EEV-basis shareholders funds with the difference being described as Additional retained profit on an EEV basis. It also shows the split of EEV into five components with the value of inforce business of 6,751 million identified in Note 15 below being grossed up to 7,811 million so that the cost of capital ( 848 million) and cost associated with the time value of guarantees ( 212 million) can be shown separately. Prudential then provides the following analysis of the movement in the components of embedded value (ie net worth and value of in-force business): IFRS equity versus European embedded value (EEV) Prudential, 2005 EEV report, Note 15, page

21 E n h a n c i n g disclosures The net worth reconciliation prepared by Prudential separately highlights the developments in EEV that are outside the control of management (eg change in exchange rates). It also indicates the extent to which changes in EEV are affected by changes in assumptions and experience variances. This information is important in evaluating management s decisions. Prudential shows how much profit ( 704 million) was expected to emerge from existing business at the beginning of the year, which is important infornation to evaluate actual performance. The company also discloses in its reconciliation the strain of new business ( 153 million). IFRS accounting would show similar negative financial effects of policies sold in the year. What the IFRS acccounting model cannot show, but the above EEV schedule does show, is that the new business adds value: it has increased EEV by 596 million in In summary, a detailed EV roll-forward schedule provides useful insight into the sources of profitability because it shows the profit that is expected to be generated from in-force business and the cost strain of new business. It distinguishes between financial developments that management cannot influence, and movements in respect of which a substantial degree of management input is required. Reconciliations of EV to IFRS equity are important because these provide a link between this detailed EV roll-forward information on the one hand, and the limited information about the value of the business that accounting models can provide on the other. The relevance to the financial statements of EV information is greatly improved by linking EV with IFRS as clearly as possible Explaining the cost of financial options and guarantees (CFOG) Insurers could harmonise and improve the disclosures they make concerning the potential costs of financial options and guarantees (CFOG) as sometimes these amounts can be significant relative to other balances being reported in the balance sheet. Although narrative information was given by all insurers on their product range, only in a limited number of cases did companies in our sample disclose their exposure to embedded options and guarantees in quantitative terms. From insurers financial statements, it is not always clear to what extent options and guarantees have been taken into account in measuring policyholder liabilities or in testing their adequacy, or whether the time value of options and guarantees has been included. There is even less information on how the investment of new money (ie future premiums and direct investment returns) under existing guarantees has been considered in measuring the liabilities. Contrary to traditional embedded value measures (TEV), European Embedded Value (EEV) takes the time value of the CFOG into account. This means that under EEV, these contractual clauses are always valued even if they are out-of-the-money at the time the EEV calculation is performed. In essence an EEV valuation takes into account the probability of conditions in the future being such that the options will be in-the-money. The following table compares the time value of options and guarantees (TVOG) with the present value of in-force (PVIF) business and it shows that TVOG can often be substantial. One of the most common forms of options and guarantees encountered in insurance companies (particularly those based in Continental Europe) is the minimum interest 21

22 E n h a n c i n g disclosures Notes: 1. The PVIF figure taken is before the deduction of the TVOG and after any deduction for the cost of capital. 2. The information for Standard Life has been taken from their member circular available on the internet. European Embedded Value Results 2005 Year-End, Ernst & Young, 2006, page 11 guarantee under which insurers guarantee policyholders a certain minimum return on an investment, or a rate at which an annuity may be purchased in the future. Given the importance of these minimum interest guarantees, we believe that the decisionusefulness of financial statements would be improved if information on options and guarantees that is gathered in the EV calculation process were disclosed. Even if this information were provided only on an EV basis (which would need to be explained to ensure that it was interpreted correctly) it would provide valuable insight into the probability-weighted value of the options and guarantees Highlighting mismatches through maturity schedules Maturity information in respect of insurance liabilities is another important risk-related disclosure requirement of IFRS 4 and IAS 32 Financial Instruments: Disclosure and Presentation 14. Some insurers in our analysis (particularly those from the UK) disclosed maturity tables of insurance contracts based on expected cash flows (currently suggested as additional information in IAS 32) rather than contractual cash flows (currently required by IAS 32). We believe that for insurance companies, information based on expected cash flows is far more relevant than contractual information because insurance contracts do not always have a maturity date. As we observed from our sample group of insurance companies, the use of the contractual basis can result in the categorisation of large liability amounts as unallocated. We anticipate that the introduction of IFRS 7 will result in more 14 IAS 1 also requires some maturity information. If items are presented in order of liquidity on the balance sheet, a current/non-current split should be provided in the notes for each item on the face of the balance sheet. All companies in our sample used this (liquidity basis) form of presentation; however the current/ non-current splits were not always presented for all items. 22

23 e n h A n c i n g disclosures widespread use of expected rather than contractual maturity dates since IFRS 4 has now been amended to specifically allow this for insurance liabilities 15. Some companies were quite explicit in their 2005 financial statements about the existence of an economic mismatch or duration gap. We consider disclosure of this type of information useful because asset-liability matching is a key driver of the profit or loss of an insurance company. It will be interesting to see if insurers in the future provide interest sensitivity information for the entire balance sheet so that the potential impact of any such duration mismatch will become more visible. An economic (or duration) mismatch 16 relates to the fact that companies are not able to match the timing of cash flows from insurance liabilities with the cash flows from the investments allocated to those liabilities. Even if such a match is possible, companies may have decided to deliberately mismatch the cash flows. For large portfolios of contracts, the duration of the liabilities is often longer than that of the related assets and so the fair value of liabilities would change by a larger amount as a result of market interest movements than the related assets, possibly creating substantial volatility in equity and/or net income. While IFRS 7 has, somewhat strangely in our view, removed the requirement in IAS 32 to show maturity information for assets, we expect that insurers will continue to provide this information in conjunction with the expected cash outflows relating to liabilities as it is important for users of financial statements to gain an understanding of possible economic mismatches. Fortis explicitly mentions the economic (duration) mismatch risk in its 2005 financial statements as follows: Concerning more specifically the Low Interest Rate risk and Reserves (LIRR) within Fortis, technical rates in provisions are based on the lower of the guaranteed rates and a regulatory maximum. Sometimes these technical rates tend to be matched by assets of similar yield, but often significant asset liability duration mismatch exists and this creates exposure to low interest rate environments and a need to test the adequacy of provisions under current yield curve assumptions. Asset-liability matching Fortis, 2005, Note 8.3, page 78 A few other companies identified specific risks regarding interest rate sensitivity in certain areas and provided additional information on these. ING and Prudential made such disclosures regarding minimum interest guarantees in Taiwan where low interest rates expose them to risk. ING disclosed the following: At 31 December 2005, the inadequacy range for Taiwan is EUR 2.8 billion to EUR 3.3 billion based on a 90% confi dence interval on a Taiwan reserve level (net of DAC and VOBA) of EUR 9 billion. The inadequacy results from a material exposure in Taiwan to a sustained low interest rate environment. This is due to long term interest rate guarantees of 6-8% embedded in the life and health contracts sold by the business until These long term guarantees and the future premiums (which have a present value of approximately EUR 20 billion) create a liability with an effective duration over 30, compared to an asset duration of approximately 9. ING stopped selling these high guarantees in its Taiwan life insurance products in The post 2001 business is adequate at a 90% confi dence interval, which partially compensates inadequacy related to the pre-2001 business. Furthermore, ING has over time strengthened reserves by EUR 420 million for this exposure and increased the internal capital allocation for this business. Duration of assets and liabilities for insurance contracts in Taiwan ING, 2005, Note 2.1, page Paragraph 39d(i) of IFRS Note that economic mismatch is quite different from the accounting mismatch. See the definitions in Appendix D. 23

24 E n h a n c i n g disclosures 4.3 Life insurance liability roll-forward schedules Paragraph 37(e) of IFRS 4 requires the disclosure of a reconciliation of changes in insurance liabilities, reinsurance assets, and related deferred acquisition costs. For life insurance companies this reconciliation (or roll-forward schedule) can provide valuable information to the users of financial statements. As we discuss below, these roll-forward schedules provide details about the impact of estimates, assumptions and variances that are not reflected in the presentation format of the traditional income statement of an insurer Linking insurance liabilities to the income statement When analysing the financial performance of insurers, users, among other things, are looking for information about the way that the income statement was influenced by: key estimates made by management when determining the value of insurance liabilities (including assumptions used); changes to assumptions previously used; and variances between expected and actual developments. This information, which is made readily available to management, is not presented in traditional income statements. Accordingly, communication of this information to users of the financial statements depends to a large extent on the quality of liability roll-forward schedules and the narrative explanations that accompany them. Premiums, interest and benefits paid to policyholders have traditionally been recognised on a cash basis. This practice makes it necessary to use an adjustment line called change in insurance liabilities 17 to reflect what should be recognised during the period on an accrual basis. Unfortunately, the use of this composite adjustment line item provides little information to users. They have to refer to liability roll-forward disclosures for more details about the actual drivers of profit. In our opinion, much could be done to improve these roll-forward statements by providing more detail about the movements in insurance liabilities in the period. Reconciliation In order to help the reader understand the relationship between the income statement and the liability roll-forward schedule, we believe that insurance companies should disclose how the change in insurance liabilities line appearing in the income statement ties in with the difference between the current and prior year s balance sheet liability amounts. This reconciliation is generally not made explicit by insurers that use the traditional income statement format, but we think it is vital. Analysis More analytically-oriented income statement schedules which provide information about assumptions, estimates and variances are in use in some jurisdictions. In Canada for instance, supplemental performance reporting formats have been developed that present an actuarial-type analysis of current year profits. The following extract is an abridged version of such a schedule from the accounts of Canadian insurer Manulife 18. We believe this format, a so-called Source of Earnings analysis, provides more useful information about 17 Under IFRS, this amount is generally further combined into an item that might be called, for example, insurance expenses. It includes other elements like benefits paid, profit share and acquisition costs; items that many companies previously would have reported separately on the face of the Income Statement. 18 Manulife is not a company which was included in this sample as it reports under Canadian GAAP, not IFRS. See also: Sources of earnings: determination and disclosure Educational note of the Canadian Institute of Actuaries, August

25 e n h A n c i n g disclosures the impact of changes in insurance liabilities, and the composition of earnings in the current period, than traditional life insurance income statement and roll-forward schedules. Example of a Source of Earnings schedule - Manulife, 2005, page 147. The details per segment have been omitted. The analysis can be further enhanced by presenting in more detail the elements that determine insurance premiums. The table below identifies the principal elements, which include investment returns, expenses, mortality, morbidity, lapses and surrenders. This type of analysis also compares expected performance with actual performance during the reporting period. Our review of 2005 financial information confirmed that similar analytical formats (albeit not as detailed) are already being used by many insurers in their EV reporting. We referred to Prudential, for example, and reproduce some of its schedules in section

26 e n h A n c i n g disclosures AEGON provides a detailed analysis of the effects of changes in the assumptions and of operating variances relating to its insurance contracts portfolio: Roll-forward schedule EV AEGON, Embedded Value 2005, page 11 Unspecified changes Changes in insurance liabilities usually have a relatively large effect on equity and net income. We noted, however, that in our sample six companies presented an item in their liability roll-forward schedules described as other movements which was greater than 5% of the total liability movement for the year. In our view, roll-forward schedules should not contain large reconciling items described as other movements Explaining the impact of shadow accounting Classifying investment assets as available-for-sale (AFS) results in fair value gains and losses on these assets being reflected directly in equity. The roll-forward of this equity component is then shown separately in the financial statements. Shadow accounting 19 results in part of this equity being transferred to other balance sheet line items like insurance liabilities, deferred acquisition costs, and intangible insurance assets. Although IFRS 4 does not require it, we believe that it is good practice to disclose the total shadow adjustment made to equity, as well as an analysis of the effect of the adjustment on the relevant balance sheet components. This analysis should also then be presented in the roll-forward tables for each of the individual balance sheet items impacted. 19 See Appendix A for an explanation of shadow accounting. 2

27 e n h A n c i n g disclosures In the extracts below, Fortis describes the use of shadow accounting in its accounting policies, and then shows the impact of the shadow adjustment in the roll-forward schedule of its life insurance contract liabilities. We note that Fortis also discloses the cumulative shadow adjustment that is part of equity; this disclosure is not reproduced below. In some of Fortis s accounting models, realized gains or losses on assets have a direct effect on the measurement of (a part of) its insurance liabilities and related deferred acquisition costs. Fortis applies shadow accounting to the changes in fair value of the investments and assets and liabilities held for trading that are linked to and therefore affect the measurement of the insurance liabilities. These changes in fair value will therefore not be part of equity. Shadow accounting Fortis accounting policies, 2005, page 36 Disclosure of the shadow adjustment that is part of life insurance liabilities- Fortis, 2005, Note 2.27, page 163. The shadow accounting disclosures we advocate are especially important when interest rates are rising and there are insurance products which guarantee certain returns to policyholders. In summary, where shadow accounting is applied, we believe that companies should be more explicit about the effects on the reported amounts in both the balance sheet and the income statement. Our view is that changes in the AFS reserve, insurance liabilities, and related assets arising from shadow accounting should be shown separately. Although shadow accounting will probably disappear in Phase II, it remains a very important accounting practice during Phase I and, as such, insurance companies should disclose clearly its impact on their financial statements Suggestion for an improved traditional life insurance roll-forward table While some companies in the industry might favour a swift change to a variance-based income statement, this is probably not a realistic prospect for the entire industry in the near future. Taking as a starting point the traditional income statement, additional information about how activities in the current year have been impacted by assumptions and variances can be provided by adapting the roll-forward schedules of insurance liabilities. These are similar to the roll-forward schedules currently in use for EV reporting. 2

28 E n h a n c i n g disclosures Using a combination of elements from the roll-forward tables presented by some companies in our analysis, we have developed the template below for discussion as we believe it reflects an improved but still traditional roll-forward schedule. As indicated in the footnotes to the table, several line items on the table should have direct note references back to the income statement or the statement of changes in equity: Subjectivity involved Insurance contracts Insurance contracts Investment contracts Investment contracts with DPF 20 with DPF 20 Premiums / deposits (1) Bonuses credited to policyholders None None Interest accretion Fees, risk premiums and other charges Low Low Benefits paid (1) None Variance between experience and assumptions (2) (2) (3) Changes in assumptions High Low Change in shadow accounting adjustment Acquisitions and divestments Foreign exchange differences Low High None Other movements Total contract liability movements Opening balance at 1 January 200 Closing balance at31 December 200 (1) For insurance contracts and investment contracts with DPF (see Appendix A) these should reconcile to the income statement. (2) May be further explained in additional notes or presented by source (expenses, mortality, etc.) in this schedule. (3) Under most present measurement methods for insurance liabilities, only the effects of inadequacy are presented. In view of the difference in the risk profiles of unit-linked and traditional insurance contracts, as well as the emphasis placed in the table on experience variances and changes in assumptions, our recommended liability roll-forward table assumes there would be a separate roll-forward for unit-linked contracts, regardless of whether these are classified as insurance or investment contracts. Our proposed format is designed to include unbundled deposit components (if any) under investment contracts and in our view it is appropriate to present movements in discretionary participation rights relating to contracts with DPF separately. 4.4 Claims development tables The final aspect of note disclosure that we believe can be readily enhanced by insurers are claims development tables (CDTs) for non-life business. The tables appeared in financial statements because IFRS 4 requires this. We agree with the IASB that these tables are very important. CDTs convey valuable information about how accurate management s prior estimates were, and the extent to which insurance liabilities are subject to variation. Whatever the value of other new disclosures, users of financial statements appear to agree that CDTs have the potential to provide some really useful information. 20 DPF (Discretionary Participation Features) is defined in Appendix D. 28

29 Enhancing disclosures According to IFRS 4, disclosure about claims development should go back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments, but it need not go back more than ten years21. As a transitional measure, IFRS 4 also provides that insurers need not provide information about claims development that occurred earlier than five years before the end of the first year in which IFRS 4 is applied. Additionally, if a company is not able to provide information on claims that occurred before the beginning of the comparative period it should disclose this fact22. The companies in our analysis used rather different histories, ranging from 2 years to 11 years. Most used the transitional 5 year period. As with other disclosures, various formats were used in Zurich Financial Services Group (Zurich) presented a table, reproduced below, which shows the adverse development of estimates of its claims liabilities mainly as a result of increasing asbestos claims. The Zurich table is based on cumulative liability development. In each column the total liability shown is the liability for the current and all previous years. The total in the last column ($46,194 million) corresponds with the net balance sheet liability for losses and loss adjustment expenses at 31 December Claims development table Zurich, 2005, Table 11.3, page 48 Paragraph 39c (iii) of IFRS Paragraph 44 of IFRS

30 e n h A n c i n g disclosures An alternative way to present the information is on a single year basis. Here the amount recognised in the 2005 balance sheet is the total of all the yearly columns. The extract below shows an example of such an approach by Royal and Sun Alliance (RSA). Claims development tables The tables below present changes in the historical general insurance provisions that were established in 2001 and the general insurance provisions arising in each subsequent accident year. The tables are presented at current year cumulative average exchange rates and have been adjusted for operations disposed of. The top triangle of the tables presents the estimated provision for ultimate incurred losses and loss adjustment expenses at the end of each accident year as at each Balance Sheet date. The lower (paid) triangle of the tables presents the amounts paid against those provisions in each subsequent accounting period. The estimated provision for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rate of exchange changes. The 2005 redundancy/ (deficiency) presents the claims development of earlier accident years incurred in the current accounting period. The redundancy/ (deficiency) is equal to the current estimate of cumulative claims less the cumulative claims paid. Consolidated claims development table - gross of reinsurance m 2001 Estimate of cumulative claims and prior Total At the end of accident year One year later Two years later Three years later Four years later Claims paid One year later Two years later Three years later Four years later Cumulative claims paid redundancy (defi ciency) Core Group (352) US (197) (117) (41) 185 (170) Reconciliation to the Balance Sheet Current year provision before discounting (549) (64) (151) Exchange adjustments to closing rates 384 Discounting (868) Present value recognised in the Balance Sheet Claims development table RSA, 2005, Note 20, page

31 E n h a n c i n g disclosures The disclosure options and choices that exist As is apparent from the examples above, there are different ways of presenting CDTs. There are also a number of practical issues which arise when preparing the information for disclosure, including: How to account for acquisitions and disposals? How to factor in the effects of foreign exchange fluctuations? How to include incurred but not reported (IBNR) claims in the tables? How to account for the effects of discounted liabilities? 23 This requires the exercise of management judgment and, in the absence of an agreed approach across the industry, requires companies to explain the options chosen. We make the following additional disclosure suggestions: Companies should disclose the factors that made management decide to use either an accident or underwriting year basis to prepare the CDT. This choice determines whether information is provided based on the year in which a claim actually occurred, or on the year in which the company was exposed to risk. Our analysis revealed that only three insurers in our sample prepared CDTs on an underwriting year basis. Accident year appears to be the more favoured approach. Companies should be disclosing how the incurred but not reported (IBNR) claims amounts are dealt with in their CDTs. Claims liabilities should not be combined with unearned premium and unexpired risk reserves as the risk profile of these liabilities is quite different. A total over or under-provision (deficit/redundancy) against the initial claims estimate, in absolute and percentage terms, should be shown. Standardise the title of the tables. While most companies in our sample referred to this information as a claims development table, there was also reference to liquidation triangles, loss development tables and run off tables. We would suggest using the term claims development table as this is the term used and defined in IFRS 4. Companies should disclose separately, and clearly label, gross and reinsured amounts in a way that is easy for readers to understand What level of detail should a CDT have? One of the factors that limit the decision-usefulness of CDTs in large insurance groups is that CDTs by necessity are presented at a high level of aggregation. Non-life insurance combines many different risks. In consolidated financial reporting it would not be reasonable to expect a large company to disclose claims development per risk type (line of business), per region and gross as well as net of reinsurance. However, one table which covers all risks may provide little meaningful information. As a compromise between presenting only one table and presenting a table for each risk and segment, companies might consider presenting at least two tables, dividing their business, as a minimum, between long tail and short tail insurance. 23 This will become even more important if the IASB requires discounting for all non-life insurance liabilities in its Phase II standard. 31

32 E n h a n c i n g disclosures Narratives and reconciliations We believe it is vital for the CDTs to be supplemented by narrative information explaining the development of the balances that are reported. When material surpluses or deficits are apparent from the tabulated claims history, it would be very useful for the readers to have some insightful commentary to explain the principal reasons that caused them. We noted from our review of 2005 financial statements that little narrative accompanied the published CDTs. A CDT in our view should contain the gross and net amounts of the insurance provisions recognised in the balance sheet. If these amounts do not appear as such on the balance sheet, for example where reinsurance is presented as an asset, a reconciliation to the amounts presented on the face of the balance sheet should be provided. 4.5 Next steps All of the disclosure suggestions we have outlined in this section are based on information that is currently being provided by insurers that have adopted IFRS. We acknowledge that, in certain instances, insurers may not have the systems to generate the suggested disclosures, but we believe that the industry should build consensus on appropriate disclosure formats to deal with insurance specific risk, the roll-forward of insurance liabilities and claims development. Our view is that comparable note disclosure greatly improves decision-usefulness and the recommendations and suggestions outlined in this section have been developed in the hope that a consistent approach will be applied across the insurance industry. 32

33 cn lo on-life s i n g observat claims development i o n s t A B l e s Closing observations We noted in our introduction that the adoption of IFRS in the insurance industry has not brought about the much hoped for consistency in presentation and disclosure between companies. What IFRS has actually done is to make even more apparent the inconsistency and complexity inherent in the accounting models that currently exist. The insurance industry acknowledges that its accounting models are seen as opaque with the result that insurance companies are increasingly providing alternative measures of value (eg EEV) in order to help users of financial statements better understand the financial performance, financial position, and the risks managed. We have focused on ways of improving key disclosure areas in this publication because we believe that more consistent disclosures will provide useful insights into the economic realities of the business of insurance companies. This can significantly improve the ability of users of the financial statements of insurance companies to evaluate their relative performance and financial positions. We also believe that insurers (especially those in Continental Europe) who make use of some of the accounting options introduced in IFRS 4 to reduce an accounting mismatch need to increase their disclosures so that readers can appreciate Claims the development consequences table of using Zurich, those 2005/ options. Table 11.3 Page 48 In our opinion the time is now right for insurers to liaise and agree on some best practice presentation formats and disclosures for the industry. While this is taking place we also believe that insurers should be engaging the IASB in a discussion around the disclosures they would like to see in the Phase II insurance standard. It is to be hoped that this engagement will result in disclosure requirements that meet the decision needs of investors and at the same time make sense from the perspective of the companies. Voluntarily improving comparability in some aspects of insurance accounting will not only help the IASB with its deliberations but it might also indirectly contribute to reducing the industry s cost of capital. 33

34 A p p e n d i c e s Appendices A Some accounting features specific to the insurance industry 35 B Sensitivity disclosures 37 C Companies included in the analysis 39 D Glossary of terms 40 E Ernst & Young insurance contacts 42 34

35 A p p e n d i x A S o m e accounting fea t u r e S Specific t o t h e insurance industr y Appendix A Some accounting features specific to the insurance industry In this publication some accounting features are referred to that are specific to the insurance industry. The glossary of terms in Appendix D is attached to help the reader in understanding the various terms used. This Appendix A describes three features that require more background information. Two of them are methods applied by insurance companies to mitigate the effects of accounting mismatches in financial statements due to the mixed measurement model that exists within IFRS. In such a mixed model some assets and liabilities are measured at cost, while others are measured at revalued amounts, fair value, or on some other basis. Accounting mismatches may also occur when related assets or liabilities are measured on the same basis, but equal and opposite value changes are recorded in different places (for example in the income statement versus equity) due to the application of different standards relating to assets and liabilities. The third feature described is discretionary participation features (DPF). These may be embedded in either insurance contracts or investment contracts and their inclusion provides the insurance company with discretion as to whether or not to allocate and pay certain amounts to contract holders. Use of current interest rates Paragraph 24 of IFRS 4 allows companies to selectively apply current market interest rates to designated insurance liability portfolios in order to mitigate any accounting mismatch. Such an accounting mismatch may be caused by insurance contracts being measured on a historical cost basis whereas the related financial assets are measured at fair value through profit or loss. In that case, measuring the insurance liabilities at current interest rates and recognising the related gains and losses in income offsets the effects of changes in market interest rates on the financial assets. However, based on our sample it appears that insurers made only limited use of this option in Only three companies in our sample disclosed that they had changed their accounting policies to re-measure certain liabilities at current rates. One of these was Fortis which made the following disclosure: Liabilities arising from Insurance Contracts and Investment Contracts with Discretionary Participation Features For life insurance contracts, future policy benefit liabilities are calculated using a net level premium method (present value of future net cash flows) on the basis of actuarial assumptions as determined by historical experience and industry standards. Participating policies include any additional liabilities relating to any contractual dividends or participations. For some designated contracts, the future policy benefit liabilities have been remeasured to reflect current market interest rates. Use of current interest rates for specific portfolios- Fortis, 2005, Note 2.2, page 35 3

36 A p p e n d i x A S o m e accounting fea t u r e s specific t o t h e insurance industr y Application of shadow accounting Paragraph 30 of IFRS 4 permits, but does not require, the application of so-called shadow accounting. Under shadow accounting, when the measurement of an insurance liability, related deferred acquisition costs or related intangible assets is directly affected by realised gains or losses on an asset of the insurer, the insurer is permitted to treat an unrealised gain or loss on the asset concerned as affecting those measurements in the same way as a realised gain or loss. Accordingly, the related adjustment to the insurance liability (or deferred acquisition costs or intangible assets) is recognised directly in equity to the extent that the unrealised gains or losses on the asset were recognised directly in equity. The IASB concluded that it would allow such practices under Phase I but considered that it was unlikely that shadow accounting would survive Phase II. Most of the 18 companies whose 2005 financial statements we reviewed applied shadow accounting. However, as explained in section 4, the level of disclosure was very limited. Accounting treatment of discretionary participation features (DPF) The IASB limited its guidance in IFRS 4 on DPF to essentially two main points: for investment contracts with DPF, previous accounting is grandfathered, and DPF amounts must now either be classified as a liability or be split into a liability and equity component, ending the use of mezzanine accounting classifications like the Fund for Future Appropriations that was widely used in the UK. IFRS 4 discusses DPF in insurance and investment contracts. These are conditional profit sharing rights embedded in contracts which may also contain guaranteed rights. The discretion that management has is over the level and/or timing of profit distribution to contract holders. In accounting for DPF, insurance company management takes a sequence of decisions. They first have to determine what part of the realised and unrealised gains or losses on investments (or profit of the company) would qualify for future profit distributions. The next, and most important, decision is what part of this allocable total is to be recognised as participation or surplus distributable to policyholders. This decision may take into consideration any contractual or legal minimum, and the company s history of distribution. However, a company could also decide to designate the total allocable amount as (potential) participation. Management also needs to decide what part of the participation to recognise as a liability, with the remainder being recognised as equity. Leaving aside guaranteed elements, the split of DPF between equity and liability can be anything from 100% of distributable surplus being classified as equity, to 100% being classified as a liability. This allocation need not resemble actual distributions in the past. It is usually based on expected future distributions, but management have a large degree of discretion over the actual split. As a consequence of this allocation choice, when actual payments are made to policyholders these will be presented either as expenses, or as profit distribution. Solvency ratios and liability adequacy evaluation can also be impacted by this allocation choice because the classification of DPF will impact the relative carrying amounts of total liabilities and equity. For all contracts with DPF, IFRS 4 allows previous (pre-ifrs) accounting policies to be continued. For investment contracts, this means an exemption from the requirements of IAS 39 and IAS 18 Revenue. Gross premiums received can still be presented in the income statement and acquisition costs capitalised are not limited to those that are incremental. (This is not the case for non-dpf investment contracts which essentially have to be accounted for like bank deposits, with limited deferral of costs). 36

37 A p p e n d i x B S e n s i t i v i t y disclosures Appendix B Sensitivity disclosures The table below summarises some of the quantative sensitivity disclosures provided in the financial statements, management discussions, and EV reports of a selection of seven companies from our analysis group. For this purpose we selected companies with a wellestablished tradition of EV reporting from four different countries. The table indicates where the sensitivity information was published (either in the financial statements, the management discussion section, or in a separate EV publication) and the different sensitivities that companies present for each main category. We also indicate the impact presented of each variable change on shareholders equity and/or on EV. An increase is indicated as + and a decrease as -. When only one variable change is given, it is because only a single sided sensitivity disclosure was made. As the table is not intended to compare the impact of changes in assumptions between companies, it does not contain amounts or percentages. However, our survey showed that in cases where the impact of exactly the same change in a variable is shown on both shareholders equity and EV, the effects in monetary terms differ substantially. This confirms that sensitivities measured against these different bases are not comparable. 37

38 A p p e n d i x B S e n s i t i v i t y disclosures Company Sensitivity test Source of information Shareholders equity impact at 31 December 2005 FS Mngt disc. EV publ. Shift UP Shift DOWN Embedded Value Life Insurance impact at 31 December 2005 Interest rates AA 50 bps parallel shift in risk-free interest + - AEGON 100 bps shift in risk-free yield curve AEGON 200 bps shift in risk-free yield curve - + AEGON 100 bps shift in discount rate - + AVIVA 1% shift in discount rate - + AVIVA 1% shift in interest rates ING 100 bps shift in interest rates - + ING 1% change in new-money rates + - ING 1% shift in discount rate - + ING implied market forward rates (Oct 31, 2005) 24 - ING 10 bps change short-term rates + Zurich 100 bps shift in discount rate - + Zurich 100 bps shift in interest rate yield curve - Prudential 1% shift in discount rate - Prudential 1% shift in interest rates + - Allianz 100 bps shift in interest rate - Allianz 100 bps shift in risk discount rate - Lapses AA overall 10% change in the lapse rates + AEGON 10% change in lapses AEGON 20% change in lapses - AVIVA 10% change in lapses + ING 10% change in lapses + Zurich 10% worsening lapses 24 - Prudential 10% change in lapses + Allianz 25% change in lapses - Mortality / morbidity AA 5% change in mortality rate for annuity business - AA 5% change in mortality rate for life business + AEGON 10% change in mortality/morbidity - + AEGON 5% change in mortality/morbidity (mortality/morbidity exposure) AEGON 5% change in mortality/morbidity (longevity exposure) - AEGON 1% mortality/ morbidity improvement per year for the entire projection period 24 + AVIVA 10%/5% change in mortality/morbidity rates - AVIVA 5% change in mortality rates assurance - AVIVA 5% change in mortality rates annuities - ING 5% change in mortality and morbidity rates + ING 10% change in mortality rates - + ING 10% change in morbidity rates - + Zurich 10% worsening demography 24 - Prudential 5% change in mortality and morbidity rates (Partly split between Life and Annuity business) + Prudential 5% shift in mortality and morbidity, annuity business - Prudential 5% shift in mortality and morbidity, life business + Allianz 10% change in mortality - Expenses AA overall and permanent 10% change in expenses + AEGON 10% change in expenses - AEGON 10% change in maintenance expenses + AVIVA 10% change in maintenance expenses - + ING 10% change in maintenance expenses + Zurich 10% change in renewal expenses + Prudential 10% change in maintenance expenses + Allianz 15% change in expenses - Shift UP Shift DOWN 24 Where the variable presented is such that it cannot be analysed between upward and downward movements the table shows the + or - impact centred between the UP and DOWN columns. 38

39 A p p e n d i x c C o m pa n i e s included in the anal y s i s Appendix C Companies included in the analysis Companies in the analysis AEGON N.V. Website Allianz Group Aviva plc AA SA Fortis B.V. ING Group N.V. KBC Münchener Rückversicherungs-Gesellschaft (Munich Re) Royal & Sun Alliance (RSA) Sanlam Limited Old Mutual plc Assicurazioni Generali S.P.A. (Generali) Swiss Life Group Zurich Financial Services Group (Zurich) AMP Limited SCOR Group Prudential Assurance Company plc Legal & General Group plc 39

40 A p p e n d i x D G l o s s a r y of terms Appendix D Glossary of terms Accounting mismatch arises when changes in the fair value of the insurance liability is not recognised at the same time as the changes in the market value of the related investment. This circumstance can arise when the accounting treatment of unrealised gains and losses of assets is not mirrored in the accounting of unrealised gains and losses for liabilities. Adjusted net worth is the total of free surplus and required capital (as used in an embedded value context). Claims development table (CDT) is a financial disclosure of historical development of the ultimate cost of claims which take more than one year to resolve. Constrained capital (in an embedded value context) is the capital that an insurer holds in order to satisfy internal and regulatory solvency requirements and/or to maintain a level of financial strength needed to acquire or maintain a certain credit rating. Covered business (in an embedded value context) are the contracts to which embedded value methodologies have been applied. Deferred acquisition costs (DAC) is an asset which represents the costs of acquiring insurance and investment contracts that are capitalised and amortised. Discretionary participation features (DPF) is defined in IFRS 4 as a contractual right to receive, as a supplement to guaranteed benefits, additional benefits: that are likely to be a significant portion of the total contractual benefits; whose amount or timing is contractually at the discretion of the issuer; and that are contractually based on: the performance of a specified pool of contracts or a specified type of contract; realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or the profit or loss of the company, fund or other entity that issues the contract. Economic (or duration) mismatch relates to the fact that the timing of cash flows from insurance liabilities does not match the timing of the cash flows from the investments allocated to those liabilities. Embedded value (EV) is a measure of the value of an insurance company. It is defined as the sum of the net assets of the insurance business under conventional accounting, and the present value of future profits. The present value of future profits is calculated using estimates of future cash flows expected to be received from policies already in force. It does not include any cash flows from future new business that is expected to be written. European Embedded Value (EEV) is an approach to calculating embedded value according to the CFO Forum s EEV principles ( Financial options and guarantees are features found in contracts which confer potentially valuable guarantees or options to change the level and nature of policyholder benefits. 40

41 A p p e n d i x D G l o s s a r y of terms These are exercisable at the discretion of the policyholder and the potential value is impacted by the behaviour of financial variables. Free surplus (in an embedded value context) is the amount of any capital and surplus allocated, but not required, to support the in-force business. In-force business includes contracts and policies that are in effect as at the valuation date. Insurance assets represent an insurer s contractual rights under an insurance contract (IFRS 4). Insurance contract is a contract under which the insurer accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder (IFRS 4). Insurance liability is an insurer s contractual obligation under an insurance contract (IFRS 4). Insurance risk is risk, other than financial risk, transferred from the holder of a contract to the issuer (IFRS 4). Investment contract is a contract issued by an insurer that does not transfer significant insurance risk, but does transfer financial risk from the contract holder to the insurer (IFRS 4). Long tail insurance refers to the length of time between an insured incident causing a claim and the settlement of the resultant claim, and normally reflects a period beyond one year from the balance sheet date. Present value is the discounted value of future cash flows. Reinsurance contract is an insurance contract issued by one insurer to compensate another insurer for losses on one or more contracts issued by the latter. Required capital (in an embedded value context) is the amount of assets, over and above the value placed on liabilities in respect of covered business, whose distribution to shareholders is restricted. Sensitivity analysis is the process of estimating the sensitivity of reported profit or loss, shareholders equity, or embedded value to a certain level of change in a specified variable, and reporting that sensitivity. Shadow accounting is an option offered by IFRS 4 to an insurer to change its accounting policies so that a recognised, but unrealised, gain or loss on an asset affects the measurement of the insurance liabilities (or deferred acquisition costs or intangible assets) in the same way as a realised gain or loss would. The adjustment is recognised in equity if the related unrealised gains or losses are recognised directly in equity. Short tail insurance: see Long tail insurance. Solvency II is an EU-initiated project which aims at establishing a risk-related solvency system that is reflective of the specific risks of insurers, and at providing common solvency principles throughout the EU. Source of earning analysis is an insurance performance reporting format that allocates the actuarial primary sources of gains and losses in each reporting period. Unit-linked contract is an insurance or investment policy under which the policyholder invests premiums into units of an investment fund. The monies of numerous investors are pooled together in the fund and used to buy certain assets. The performance of the unit-linked contract is dependent directly on current investment returns on the fund. The risk of fluctuations in returns is usually borne by the policyholders rather than the company writing the policy. Value of business acquired (VOBA) is an asset that represents the present value of estimated net cash flows embedded in insurance contracts acquired, whether directly from another insurer or as a part of a business combination. Value of business in-force (VBI) (in an embedded value context) is the present value of future after-tax statutory book profits expected to arise from the in-force business, including new business written in the reporting period less the cost of capital. 41

42 A p p e n d i x E E r n s t & Young insurance conta c t s Appendix E Ernst & Young insurance contacts Country Name Telephone Graeme Mckenzie [email protected] Australia Grant Peters* [email protected] Baltics Ramunas Bartasius [email protected] Belgium Bruno Moors [email protected] Brazil Luis Carlos Nannini [email protected] Jim Christie* [email protected] Canad a Phil Arthur [email protected] China Bruce Moore* [email protected] France Eric Meistermann* [email protected] Pierre Planchon [email protected] Germany Andreas Freiling [email protected] Ralf Widmann* [email protected] Hong Kong Jasper Kolsters [email protected] Ashvin Parekh [email protected] India Farrokh Tarapore [email protected] AnnaCannella* [email protected] Gabriele Pieragnoli* [email protected] Italy Matteo Brusatori [email protected] Jap an Peter Duran* [email protected] Toshihiko Kawasaki* [email protected] Mexico Esteban Ailloud [email protected] Jose Mendez* [email protected] Niek de Jager [email protected] Netherlands Rob Gaillard [email protected] Rob Van Leijenhorst* [email protected] Adam Fornalik* [email protected] Poland AnnaSirocka [email protected] Portugal Ana Salcedas [email protected] Singapore Sok Hiang Koh [email protected] Russia AnastasiaVinogradova [email protected] CorneaDe Villiers [email protected] South Africa Malcolm Rapson* [email protected] Spain Javier Pancorbo* [email protected] Sweden Goran Abrahamsson [email protected] Switzerland Brian Edey* [email protected] Marcel Stalder [email protected] Ukraine Oleksiy Zosimov [email protected] Alan Leslie [email protected] James Dean [email protected] United Kingdom United States James Tufts* [email protected] Kevin Griffith [email protected] Jennifer Weiner [email protected] Mark Freedman* [email protected] Rick Lynch [email protected] * Ernst & Young Actuarial 42

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44 Ernst & Young, a global leader in professional services, is committed to restoring the public s trust in professional services firms and in the quality of financial reporting. Its 114,000 people in 140 countries pursue the highest levels of integrity, quality and professionalism in providing a range of sophisticated services centred on our competencies of auditing, accounting, tax and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at www. ey.com/perspectives. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global limited does not provide services to clients. ERNST & YOUNG EYGM Limited. All Rights Reserved. Disclaimer This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organisation can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. EYG No. AU indd 11/2006 (UK). Produced by Ernst & Young UK Sales Support & Marketing Design Team. 44