Actuary India Oct 2011

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INDIAN ACTUARIAL PROFESSION
Serving the Cause of Public Interest
3 Indian Actuarial Profession Serving the Cause of Public Interest The Actuary India October 2011
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Chief Editor
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Editor
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4
C O N T E N T S
FROM THE CHIEF EDITOR
NICK TAKET disousses the importanoe of
judgment to the profession
FROM THE PRESIDENT
LIYAQUAT KHAN reports 16th LAAC
happenings in Kuala Lumpur and also talks
about lRUA oiroular proposing ohanges to the
lRUA (Appointed Aotuary) Regulation, 2000
ANNOUNCEMENT
FEATURES
Uifferenoes Between llR3s and lnd A3
A Peep into lnd A3 19: 1he New way
for Pension Liability Measures and
Disclosures
By R Arunaohalam and Nasrat Kamal
3olvenoy ll update - results of l35
By 0autam Kakar
CAREER CORNER
3enior Manager Aotuarial at
lClCl Prudential Life in Mumbai
INTERVIEW
& A 3L33l0N: PL1LR U0LL
FROM THE PRESS
DNA - New norms on aotuaries bode well
for general insurers
IAA and ISSA 3ign Memorandum of
Understanding in Geneva
IAA Partioipates in 1oint Uisoussion
lorum with lL0, l33A and w0 in
Geneva
IAIS foouses on tnanoial stability in
its 2010/11 Annual Report
IAA- Private 3eotor 1ask loroe oalls on
0-20 to promote Regulatory Convergenoe
FROM THE DESK OF
Chairperson - Advisory 0roup on
Pension, other Lmployee Benetts &
Social Security (PEBSS)
- K 3ubrahmanyam
BOOK REVIEW
The Fundamentals of Pension
Mathematios by Barnet N Berin
Reviewed by 3uresh 3indhi
Proteoting the working poor -
Annual Report 2010 published by lL0
Review by Kamlesh 0upta
SHILPA'S PUZZLES
ENTRY EXAM
5
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FROM THE CHIEF EDITOR
T
he work carried out by actuaries has changed very signifcantly over the last few decades. Today we
routinely carry out investigations and analyses that would have been unheard of 25 years ago. It might
be thought that this is a measure of how much actuarial science has developed in that time. However, in
practice I believe that the application of actuarial science has developed little. Most of the changes brought
about in actuarial practice have come about because of the huge amount of cheap computing power that
actuaries have at their disposal today.
It is not that our predecessors were not aware of the issues that we deal with today or that they ignored them, it
was just that they could not tackle them by the use of brute computing power as we do today. Instead they had
to rely more on their insights and judgement to fnd solutions. I believe this made them more rounded actuaries,
who were better equipped to face the challenges that our profession will face in the future. By which I mean
they were forced to spend more time thinking deeply about and understanding the fnancial risks and problems
they faced.
By contrast, today if a problem is complicated we tend to take the easy way out and simply write or run a
programme to show us the possible answers.
There are a number of dangers for the profession in this approach. It allows the belief to grow that actuaries are
simply people who use actuarial software, and it fails to promote the development and application of the skill
of judgement within our members.
There are already people outside the profession who think that actuaries are just number crunchers. In addition,
we must all at some point of time have heard employers or clients wonder why they have to have so many
actuaries, surely they could manage by buying some actuarial software and get the IT department to run it.
At a simple level this suggestion can be refuted by employing the old computer adage Garbage in, garbage out,
which is true of any software. However, this does not address the fundamental problem which is as actuaries
what is our unique selling proposition?
To my mind our USP is our ability to use judgement and insight to simplify and fnd solutions to complex fnancial
and risk problems. Yes, we use actuarial software, but this is just one of the tools of our trade.
We add value not by running the software but using our judgement to decide
when to use the software, and when not;
what needs to be modelled, and what does not;
what scenarios will be important, and which less so;
what modifcations need to be made to products or schemes to achieve the result
required by the client; and so on.
Our use of judgement is a signifcant value addition to our employers and clients, and we must
do all we can to promote this skill amongst the members of the profession. We need to ensure
that our education and examination system not only teaches the use of software tools, but also
places a major emphasis on the development of the skills of judgement and insight. These
constitute our main USP and we ignore them at our peril.
Will we as a profession always be able to rely on these skills? This is a diffcult question to
answer, but a simple analogy with chess gives some food for thought.
Many years ago it was believed that the number of possible moves in a chess game was just so large that a
computer would never be able to beat a human at chess.
But then computing power grew exponentially, and it was not long before the very best chess computers could
beat all but the very best chess grandmasters.
It was then believed that this situation would remain unchanged because although grandmasters do analyse
a huge number of possible future moves, their unique strength lies in their ability to discount future moves
that lead to weak positions and focus only on those that lead to strong positions. If asked to defne weak
and strong positions grandmasters would become somewhat vague, but in essence it was a matter of them
exercising their judgement.
There the matter rested for a number of years, until computing moved on, not in computing power, but in the
ability to teach computers to judge strong and weak positions, so that now even the very best chess players
in the world can be beaten by the very best chess computers.
So does the same fate await the actuarial profession?
Possibly, but the analogy with chess is not perfect since chess is a game with
a fxed set of rules,
a limited number of pieces with clearly defned roles,
an unambiguous defnition of victory.
Whereas actuaries operate in an environment in which
the rules keep changing,
there are a large number of stakeholders whose roles continue to evolve over time, and
even the defnition of victory varies between players!
This leads to suffcient complexity and uncertainty to ensure that actuaries should be able to hold the computers
at bay for a good few years to come.
Nick Taket
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FROM THE PRESIDENT
he 16th East Asian Actuarial Conference lessons to learn from:
As I write (13
th
Oct., 2011) in Kuala Lumpur the 16
th
East Asian Actuarial Conference (16
th
EAAC) is on
and will come to an end this evening. Organised by the East Asian Actuarial Congress (eaac), its the
16
th
one held biennially and the very frst one too was in Kula Lumpur. For the Actuarial Society of Malaysia
it was a nostalgic memory to recall, one of the then Organising Committee members from Malaysia is still
around: he was recognised during the inaugural function on 11
th
Oct., 2011.
Mr. Donald Joshua Jaganathan, Assistant Governor, Bank Negara Malaysia was there to inaugurate and deliver
Key Note address.
A bit of a nostalgia for us in IAI too -- Years 2003/04 were hectic for us as we worked hard to become a member
of the eaac and were admitted to it in the year 2005 during the 13
th
EAAC in BALI, Indonesia. The eaac opened
its door for the frst time beyond the original NINE founding members. This was followed by Australia, thus the
eaac is now ELEVEN members TEAM.
Things are changing fast the Global Economic down-turn triggered by US Subprime mortgage defaults in the
years 2007/08 ended in global debate and dialogue including the Actuarial Community lead by International
Actuarial Association (IAA). Was there a voice in this global debate and dialogue amongst the actuarial
community from Asia/Asia Pacifc? Can not think of one! Not surprising to me atleast!
In the Asia/Asia Pacifc we have to move fast: our economies are interlinked, social and cultural values are
intertwined as well.
A small though important step: the eaac Board of Eleven members met on 10
th
Oct., to decide amongst other
matters to have the EAAC once a year after the next one in Singapore in year 2013. The circle moves in
alphabetical order so the 18
th
EAAC will be in Taiwan and probably India will get its turn in the year 2018.
The 16
th
EAAC, at the last count amongst 508 participants, had its member associations contributing;
Malaysia: 162, Singapore: 85, Indonesia: 62, Hong Kong: 54, South Korea: 44, Japan: 14,
Taiwan: 12 Thailand: 12, India: 11, Australia: 11, The Philippines: 8 Total eaac members:
475 Others: 33
India with student population of 12,000+, the highest amongst the eaac member countries,
surely could have done better.
The Appointed Actuary in India:
The IRDA circular dt. 5
th
Sept., 2011 proposing changes to the IRDA (Appointed Actuary)
Regulation, 2000 has brought quite lot of agitative application of mind amongst the stake
holders: the Insurers, the IAI members particularly those who are Appointed Actuaries
and are adversely affected and hopefuls to serve as Appointed Actuaries. The position of
Appointed Actuary is and as much perceived as a position of importance and power within
the corporate structure of an Insurer. The Introduction of the Appointed Actuary system in the
year 2000 concurrently with the opening up of the insurance sector to private participation was
somewhat of an historical importance. It was aimed at as an effective system of regulatory instrument so as to
ensure fnancial stability of the insurer: having enough money to enable it to pay policyholder liabilities as and
when these fall due and the insurer required to hold on to solvency level with adequate capital for writing new
business, fell on the shoulders of the Appointed Actuary. Neither the AA system implies that the insurers would
not have actuarial staff other than those required to support the role of the Appointed Actuary nor does it mean
that the insurance regulator, IRDA would not have actuarial staff to perform its regulatory role. The Appointed
Actuary concept sits frmly on the belief that the regulatory roles expected of the Appointed Actuary could not
be performed well if such person were not part of the corporate structure of the insurer, not even if he/she
were to operate from within the offce of the Insurance regulator. Nevertheless such Appointed Actuary has his/
her primary loyalties to the insurance regulator. A sound legal structure for this to happen is essential besides
ensuring that professional standards required of the professional body of the Appointed Actuary are complied
with and strictly enforced. This latter role of the actuarial body has to be demonstrative so as to ensure public
and the regulator of required level of comfort on ongoing basis. In case of India has this happened?
Questions have been raised. Aside from the circular from IRDA proposing changes to the provisions of the
(Appointed Actuary) Regulations, after about a decade do we not sit up and examine;
i) the framework of rules against which we issue certifcate of Practice,
ii) the adequacy of Actuarial Practice Standards (earlier called Guidance Notes) that Appointed Actuaries are
required to observe,
iii) the compliance mechanism to ensure that the Actuarial Practice Standards are indeed complied with and
disciplinary actions that should follow in case of non-compliance,
iv) capacity building programmes to support the Appointed Actuary on ongoing basis, and that the ethical
standards are understood and followed.
Last but not the least the IRDA proposal, the Appointed Actuary shall not function in any capacity other
than Appointed Actuary in the offce of the insurer should in my view be a welcome proposal. The CFO and
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MARK YOUR DATES FOR THE UPCOMING EvENTS
Event Organised by Date Place
6
th
Current Issues in Retirement Benefts PEBSS Advisory Group November 18-19, 2011 Mumbai
7
th
Current Issues in Life Assurance Life Insurance Advisory Group November 24-25, 2011 Mumbai
1
st
Current Issues in General Insurance General Insurance Advisory Group December 2, 2011 Mumbai
16
th
India Fellowship Seminar PEC Advisory Group December 15-17, 2011 Mumbai
6
th
Current Issues in Health & Care Insurance Health & Care Insurance Advisory Group January, 19-20, 2012 Gurgaon
14
th
Global Conference of Actuaries PSIR Advisory Group February 19-21, 2012 Mumbai
Contact Person: Aparajita Mitra (aparajita@actuariesindia.org)
The Institute of
Actuaries
of
India
announces
IAI Connect
Organised by:
Social, Cultural and Youth Affairs advisory group (SC&YA)
Date: 3rd Dec 2011
Time: 10 am to 3 pm
venue:
Sai Palace Hotels, Mahakali Caves Road, Chakala,
Andheri East, Mumbai - 400093.
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the Appointed Actuary defnitely have conficts of interest: Appointed Actuary determines the capital required for doing
or holding certain amount of business and the CFO has to ensure that such capital is available. The CRO identifes and
measures all the risks that the insurers holds within, the Appointed Actuary measures some of these (but not all) and
reserves for. The confict of interest of the CEO with the role of the Appointed Actuary is obvious. The question is not that
these conficts of interest exist; of course these do but the question is that the role boundaries of these positions should
be designed to be non-overlapping and thus non-frictional. Responsibility for defning such role boundaries, which have
serious regulatory implications, cant be left to the Board of Insurance Companies alone.
Liyaquat Khan
Vide notifcation dated 26 July 2011 the Government of India has nominated
Shri Arvind Kumar, Joint Secretary (Pension & Insurance)
as a member of the Council of the Institute of Actuaries of India to represent the
Ministry of Finance vice Mr. Tarun Bajaj, Ex- Joint Secretary (Banking and Insurance).
Mr. Arvind Kumar
Bringing Institute closer to the student members through series of
interactive sessions
Talk by a senior Fellow
Exam dealing techniques by a recently qualifed Fellow
Industry overview or talk by an actuarial employer
For more details about the workshop and downloading the registra-
tion form, please visit www.actuariesindia.org. There are limited seats
for the event, so registration will be done on frst come frst serve basis.
For any other queries, please email aparajita@actuariesindia.org.
(Courtsey the Chartered Accountant Journal of ICAI.July 2011)
DIFFERENCES BETwEEN IFRSs aND Ind aS
T
his note is issued by the Institute
of Chartered Accountants of India
(ICAI) to bring out the differences
between the IFRSs
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as applicable on
1
st
April, 2011 and the corresponding
Indian Accounting Standards (Ind ASs)
placed by the Ministry of Corporate
Affairs (MCA), Government of India,
on its website after recommendation
of the same by the National Advisory
Committee on Accounting Standards
(NACAS) and the ICAI.
The Ind ASs placed on the MCA website
when notifed under Section 211 (3) (c)
of the Companies Act, 1956 by the MCA
will be applicable to the companies
from the date specifed in the said
notifcation. Section I of the note
contains IFRSs deferred by the MCA.
Section II contains carve outs from
IFRSs in the relevant Ind ASs. Section III
contains Other major changes in Indian
Accounting Standards vis--vis IFRSs
not resulting in carve outs. Section IV
contains a comparative chart of IFRSs
and corresponding Ind ASs indicating,
inter alia, IFRSs in respect of which
no corresponding Ind AS has been
formulated and reasons therefor.
I. IFRSs deferred by the MCA
1. Ind AS 11, Construction Contracts
IFRIC 12 and SIC 29, Service
Concession Arrangements and
Service Concession Arrangements:
Disclosures, respectively, which are
included as Appendices A and B to
Ind AS 11, Construction Contracts,
respectively, would not be notifed along
with the other standards and their
application has been deferred.
Reasons
MCA received feedback regarding the
adverse consequences which may
ensue to the Indian companies in the
event of immediate adoption of the
IFRIC 12. Hence, MCA decided that
Appendix A to Ind AS 11, corresponding
to IFRIC 12, Service Concession
Arrangements should be deferred and
the same may be examined and applied
with or without modifcation later.
Appendix B to Ind AS 11, corresponding
to SIC 29, Service Concession
Arrangements: Disclosures, is related
to IFRIC 12. Therefore, it has also been
deferred.
2. Ind AS 17, Leases
IFRIC 4 Determining Whether an
Arrangement contains a Lease, which
is included as Appendix C to Ind AS 17,
Leases would not be notifed alongwith
the other standards and its application
has been deferred.
Reasons
MCA received feedback regarding the
adverse consequences which may
ensue to the Indian companies in the
event of immediate adoption of the
Appendix C to Ind AS 17, corresponding
to IFRIC 4. Hence, MCA decided that
the Appendix should be deferred and
the same may be examined and applied
with or without modifcation later.
3. Ind AS 106, Exploration for and
Evaluation of Mineral Resources
Ind AS 106 corresponding to IFRS
6, Exploration for and Evaluation
of Mineral Resources, would not be
notifed immediately as it is under
consideration of the Government.
Reasons
MCA is of view that the standard is open-
ended offering freedom to companies
to follow virtually any policy they like.
The standard does not prescribe any
standardisation. In such circumstances,
the standard does not serve any
useful purpose and may create a
wrong impression in the mind of the
stakeholders that the entity concerned
has complied with a strict standard
when in fact, the company is free to apply
any accounting treatment it wants. This
may even be counter productive from a
regulatory point of view by giving a false
sense of correctness. Hence, this Ind AS
may not be notifed immediately.
II Carve Outs
A. Carve-outs which are due to
differences in application of
accounting principles and practices
and economic conditions prevailing in
India.
1. Ind AS 21, The Effects of Changes
in Foreign Exchange Rates As per IFRS
IAS 21 requires recognition of exchange
differences arising on translation of
monetary items from foreign currency
to functional currency directly in proft
or loss.
Carve out
Ind AS 21 permits an option to
recognise exchange differences arising
on translation of certain long-term
monetary items from foreign currency
to functional currency directly in equity.
In this situation, Ind AS 21 requires
the accumulated exchange differences
to be amortised to proft or loss in an
appropriate manner. IAS 21 does not
permit such a treatment.
Reasons
(i) There is signifcant fuctuation in
the value of US dollar vis--vis rupee.
India plans for a large expenditure on
infrastructure. This may need a very
large infow in the foreign borrowings.
These borrowings are denominated in
foreign currencies unlike developed
countries where borrowings are
denominated in localcurrencies.
(ii) Unlike currencies of many advanced
countries, rupee is not fully convertible.
(iii) Hedging is not possible for the
full period for which the loan is taken.
Hedging is available for shorter periods
but not for longer periods, and the
duration of the borrowings is very long.
(iv) Indian companies are not permitted
to prepay the foreign currency loans.
(v) Other countries such as South Korea
have also been raising these issues.
(vi) It is not appropriate to recognise the
exchange differences immediately which
arise as a result of items which are to be
paid/realised in foreign currency, after a
long term nature.
2. Ind AS 28, Investment in Associates
As per IFRS
IAS 28 requires that difference between
the reporting period of an associate and
that of the investor should not be more
than three months, in any case.
1
The term IFRS includes not only the International Financial Reporting Standards (IFRSs) issued by the IASB, it also includes the International Accounting Standards
(IASs), IFRICs and SICs.
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Carve out
The phrase unless it is impracticable
has been added in the relevant
requirement i.e., paragraph 25 of Ind
AS 28.
Reasons
Since the investor does not have control
over the associate, it may not be able
to infuence the associate to change
its accounting period if it does not fall
within 3 months.
Apart from this, another reason can
be a situation, e.g., where an entity
is an associate of two investors and
difference between the reporting dates
of the associate and the investors
is more than three months and the
reporting dates of the two investors are
also different. In that case a problem
will arise that in respect of which
investor the associate will have to
change its reporting period.
3. Ind AS 28, Investment in Associates
As per IFRS
IAS 28 requires that for the purpose of
applying equity method of accounting in
the preparation of investors fnancial
statements, uniform accounting policies
should be used. In other words, if the
associates accounting policies are
different from those of the investor, the
investor should change the fnancial
statements of the associate by using
same accounting policies.
Carve out
The phrase, unless impracticable to
do so has been added in the relevant
requirements i.e., paragraph 26 of Ind
AS 28.
Reasons
Since the investor has signifcant
infuence and not control over the
associate, it may not be able to infuence
the associate to change its accounting
policies.
4. Ind AS 32, Financial Instruments:
Presentation
Carve out
An exception has been included to
the defnition of fnancial liability
in paragraph 11 (b) (ii), Ind AS 32 to
consider the equity conversion option
embedded in a convertible bond
denominated in foreign currency to
acquire a fxed number of entitys
own equity instruments as an equity
instrument if the exercise price is fxed
in any currency. This exception is not
provided in IAS 32.
Reasons
This position is not appropriate in
instruments such as FCCBs since the
number of shares convertible on the
exercise of the option remains fxed and
the amount at which the option is to be
exercised in terms of foreign currency is
also fxed; merely the difference in the
currency should not affect the nature of
derivative, i.e., the option.
5. Ind AS 39, Financial Instruments:
Recognition and Measurement
As per IFRS
IAS 39 requires all changes in fair values
in case of fnancial liabilities designated
at fair value through Proft and Loss at
initial recognition shall be recognised in
proft or loss. IFRS 9 which will replace
IAS 39 requires these to be recognised
in other comprehensive income.
Carve out
A proviso has been added to paragraph
48 of Ind AS 39 that in determining the
fair value of the fnancial liabilities which
upon initial recognition are designated
at fair value through proft or loss, any
change in fair value consequent to
changes in the entitys own credit risk
shall be ignored.
Reasons
It is felt that recognition of gain in proft
or loss or in other comprehensive
income on deterioration of own
credit risk is not proper because such
deterioration ordinarily occurs when
an entity is incurring losses. Thus, if an
entity is allowed to recognise gain on
deterioration of its own credit risk, it will
book gains when its performance is not
upto the mark. In the recent fnancial
crisis in USA, it was noted that some
banks booked gains while they were
incurring losses due to the crisis.
6. Ind AS 103, Business Combinations
As per IFRS
IFRS 3 requires bargain purchase gain
arising on business combination to be
recognised in proft or loss.
Carve out
Ind AS 103 requires the same to be
recognised in other comprehensive
income and accumulated in equity
as capital reserve, unless there is
no clear evidence for the underlying
reason for classifcation of the business
combination as a bargain purchase,in
which case, it shall be recognised
directly in equity as capital reserve.
Reasons
It is felt that recognition of such gains
in proft or loss would result into
recognition of unrealised gains as the
value of net assets is determined on
the basis of fair value of net assets
acquired.
7. Ind AS 101, First-time Adoption of
Indian Accounting Standards
(i) Presentation of comparatives in
the First-time Adoption of Indian
Accounting Standards (Ind AS) 101
(corresponding to IFRS 1)
As per IFRS
IFRS 1 defnes transitional date as
beginning of the earliest period for which
an entity presents full comparative
information under IFRS. It is this date
which is the starting point for IFRS and
it is on this date the cumulative impact
of transition is recorded based on
assessment of conditions at that date by
applying the standards retrospectively
except to the extent specifcally provided
in this standard as optional exemptions
and mandatory exceptions. Accordingly,
the comparatives, i.e., the previous year
fgures are also presented in the frst
fnancial statements prepared under
IFRS on the basis of IFRS.
Carve out
Ind AS 101, requires an entity to provide
comparatives as per the existing
notifed Accounting Standards. It is
provided that, in addition to aforesaid
comparatives, an entity may also
provide comparatives as per Ind AS on
a memorandum basis.
Reason
This would facilitate smooth
convergence with IFRS as comparatives
are not required to be in accordance
with the Ind ASs. It is also felt that since
Ind AS 101 would not be considered
to be in existence for the comparative
period, requiring comparatives to be
prepared on the basis of Ind AS may not
be legally defensible.
(ii) Presentation of reconciliation
As per IFRS
IFRS 1 requires reconciliations for
opening equity, total comprehensive
income, cash fow statement and
closing equity for the comparative
period to explain the transition to IFRS
from previous GAAP.
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Jobprofle
Designation Senior Manager Actuarial
Department - Actuary
Location Prabhadevi, Mumbai
Qualifcation/Experience/Competencies(Noofyears&type)/Age
Engineer/MBA/CA
Should have cleared most of the CT papers
Strong analytical and innovative problem solving skills;
Excellent written and oral communication skills;
At least 4 years in actuarial department of a life offce
Should have sound knowledge of Embedded Value Reporting / Valuation agency
Should be profcient in Prophet and excel
Key Accountabilities of the Role Manage and deliver
Quarterly Embedded Value Reporting process including Analysis of Movements. It consists of
a. Market Consistent Basis
b. Traditional Basis
- for our Board and
- for incorporation into Prudential Corporation Asia disclosures.
c. Traditional Basis channel (sub business unit) level Analysis of Movements
Monthly New Business Reporting Process
User Acceptance Testing of the Embedded Value / Market Consistent Embedded Value models
Investigating various Experience Variances and providing inputs to the Assumption Setting Process
About ICICI Prudential life Insurance
ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank - one of Indias foremost fnancial ser-
vices companies-and Prudential plc - a leading international fnancial services group headquartered in the United
Kingdom.
Further information about us can be explored at www.iciciprulife.com. Pls e-mail resumes
to ruchi.kamdar@iciciprulife.com with Senior Manager Actuarial as the subject.
Carve out
Ind AS 101 provides an option to
provide a comparative period fnancial
statements on memorandum basis.
Where the entities do not exercise this
option and, therefore, do not provide
comparatives, they need not provide
reconciliation for total comprehensive
income, cash fow statement and
closing equity in the frst year of
transition but are expected to disclose
signifcant differences pertaining to
total comprehensive income. Entities
that provide comparatives would have to
provide reconciliations which are similar
to IFRS.
Reason
convergence with IFRS.
(iii) Cost of Non-current Assets Held
for Sale and Discontinued Operations
on the date of transition on First-
time Adoption of Indian Accounting
Standards (Ind AS)
Carve out
Ind AS 101 provides transitional relief
that while applying Ind AS 105 - Non-
current Assets Held for Sale and
Discontinued Operations, an entity may
use the transitional date circumstances
to measure such assets or operations
at the lower of carrying value and fair
value less cost to sell.
Reason
(iv) Foreign currency gains/losses
on translation of long term monetary
items
Carve out
Ind AS 101 provides that on the date
of transition, if there are long-term
monetary assets or long- term monetary
liabilities mentioned in paragraph
29A of Ind AS 21, an entity may
exercise the option mentioned in that
paragraph regarding spreading over
the unrealised Gains/Losses over
the life of Assets/Liabilities either
retrospectively or prospectively. If this
option is exercised prospectively, the
accumulated exchange differences in
respect of those items are deemed to
be zero on the date of transition.
Reason
Exemption given as a consequence of
optional treatment prescribed in Ind AS
21, The Effects of Changes in Foreign
Exchange Rates, in context of exchange
differences arising on account of certain
long-term monetary assets or long-term
monetary liabilities.
(v) Financial instruments existing on
transition date
Carve out
Ind AS 101 provides that the fnancial
instruments carried at amortised cost
should be measured in accordance with
Ind AS 39 from the date of recognition
of fnancial instruments unless it is
impracticable (as defned in Ind AS 8)
for an entity to apply retrospectively
the effective interest method or the
impairment requirements of Ind AS 39.
If it is impracticable to do so then the fair
value of the fnancial asset at the date
of transition to Ind-ASs shall be the new
amortised cost of that fnancial asset at
the date of transition to Ind ASs.
Ind AS 101 provides another exemption
that fnancial instruments measured at
fair value shall be measured at fair value
as on the date of transition to Ind AS.
Reason
This exemption would facilitate smooth
(vi) Defnition of previous GAAP under
Ind AS 101 First-time Adoption of
As per IFRS
IFRS 1 defnes previous GAAP as the
basis of accounting that a frst-time
adopter used immediately before
adopting IFRS.
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Carve out
Ind AS 101 defnes previous GAAP as
the basis of accounting that a frst-
time adopter used immediately before
adopting Ind ASs for its reporting
requirements in India. For instance,
for companies preparing their fnancial
statements in accordance with the
existing Accounting Standards notifed
under the Companies (Accounting
Standards) Rules, 2006 shall consider
those fnancial statements as previous
GAAP fnancial statements.
Reason
The change makes it mandatory
for Indian companies to consider
the fnancial statements prepared
in accordance with existing notifed
Indian accounting standards as was
applicable to them as under Companies
(Accounting Standards)
Rule, 2006 as previous GAAP when
it transitions to Ind AS as the law
prevailing in India does not recognise
the fnancial statements prepared in
accordance with Accounting Standards
other than those prescribed under the
Companies Act.
(vii) Cost of Property, Plant and
Equipment (PPE), Intangible Assets,
Investment Property, on the date of
transition of First-time Adoption of
Indian Accounting Standards.
Ind AS 101 provides an entity an option
to use carrying values of all assets as
on the date of transition in accordance
with previous GAAP as an acceptable
starting point under Ind AS
Reasons
The existing Indian notifed Accounting
Standards are not signifcantly different
from IFRS as all the standards have
been based on IFRS. It will minimise the
cost of convergence.
B.Carve-outs for specifc industries
1. Ind AS 18, Revenue
As per IFRS
On the basis of principles of the
IAS 18, IFRIC 15 on Agreement for
Construction of Real Estate, prescribes
that construction of real estate should
be treated as sale of goods and
revenue should be recognised when
the entity has transferred signifcant
risks and rewards of ownership and has
retained neither continuing managerial
involvement nor effective control.
Carve out
IFRIC 15 has not been included in Ind
AS 18, Revenue. Such agreements
have been scoped out from Ind AS 18
and have been included in Ind AS 11,
Construction Contracts.
Reasons
(i) IFRIC 15, would have required the
real estate developers to recognise the
revenue in their fnancial statements
based on the completion method i.e.,
only in the last year of the completion
of the project. In that case, the proft
and loss account of the developers will
not truly refect the performance of the
business, as during the years the real
estate project continues, no revenue
will be recognised. In other words, proft
and loss account will not refect proper
measure of performance of business.
(ii) Some countries such as Malaysia
have also decided not to apply IFRIC
15 for the time being. Similarly, while
Singapore has decided to issue IFRIC
15, it has provided specifc guidance in
the context of legal situations prevailing
in that country.
2. Ind AS 18, Revenue
Carve out
A footnote has been added in paragraph
1 to Ind AS 18, Revenue, that for rate
regulated entities, this standard shall
stand modifed, where and to the extent
the recognition and measurement of
revenue of such entities is affected
by recognition and measurement of
regulatory assets/liabilities as per the
Guidance Note on the subject being
issued by the Institute of Chartered
Accountants of India.
Reason
Rate regulated entities such as
electricity companies are subject
to tariff fxation by the relevant
authorities. Tariff is fxed on the basis
of certain costs which are different
from the expenses recognised in
fnancial statements. Such differences
may result into certain regulatory
assets and regulatory liabilities which
are presently not recognised as per
the IFRS. Such entities feel that
such assets and liabilities exist and,
therefore, should be recognised in
fnancial statements. IASB had earlier
taken up a project on this subject which
has been dropped from its Agenda. ICAI
is developing a Guidance Note on the
subject.
3. Indian Accounting Standard on
Agriculture (Corresponding to IAS 41)
As per IFRS
IAS 41, Agriculture, requires
measurement of biological assets, viz.,
living animals and plants at fair value
and recognising gains and losses arising
on such measurement in proft or loss,
unless ascertainment of fair value is
unreliable.
Carve out
It has been decided to revise the
Standard and not to issue the standard
as it is.
Reasons
(i) There is diffculty in identifying the
attributes of biological assets, the cost
of fair valuation, and high volatility of
signifcant qualitative factors (not within
the control of the entity) leads to greater
subjectivity in estimating fair value.
(ii) The quoted market price for bearer
biological assets (e.g. long-term assets
that produce each year such as tea,
coffee, rubber and palm oil trees) is
not easily available, since these are not
traded in the open market.
(iii) Present value (PV) method is to
be adopted for estimating fair value
of biological assets such as forests.
Making appropriate estimates of future
price and costs levels are key factors
for a reliable fair value measurement
of standing forests. Due to the long-
term nature of the period of cash fows,
small fuctuations in the assumptions
may have a signifcant effect on the
calculated fair value.
(iv) Fair value of biological assets may not
be relevant because most plantations
are rarely sold. Fair valuation may give
the impression that the value of the
company increases when in reality
nothing has changed.
(v) Considering the high volatility of
prices for the end products, the fair
value adopted as cost as per IAS 41,
may result in very signifcant impact on
the proftability of the companies.
III Other major changes in Indian
Accounting Standards vis-a-vis IFRSs
not resulting in carve-outs
1. Ind AS 1, Presentation of Financial
Statements
1. With regard to preparation of
Statement of proft and loss, IAS 1,
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Presentation of Financial Statements,
provides an option either to follow the
single statement approach or to follow
the two statement approach. While
in the single statement approach,
all items of income and expense
are recognised in the statement of
profit and loss, in the two statements
approach, two statements are
prepared, one displaying components
of profit or loss (separate income
statement) and the other beginning
with profit or loss and displaying
components of other comprehensive
income. Ind AS 1 allows only the single
statement approach.
2. IAS 1 requires preparation of a
Statement of Changes in Equity as a
separate statement. Ind AS
1 requires the Statement of Changes
in Equity to be shown as a part of the
balance sheet.
3. IAS 1 gives the option to individual
entities to follow different terminology
for the titles of fnancial statements. Ind
AS 1 is changed to remove alternatives
by giving one terminology to be used by
all entities.
4. IAS 1 permits the periodicity, for
example, of 52 weeks for preparation of
fnancial statements. Ind AS 1 does not
permit it.
5. IAS 1 requires an entity o present
an analysis of expenses recognised in
proft or loss using a classifcation based
on either their nature or their function
within the equity. Ind AS 1 requires only
nature-wise classifcation of expenses.
6. IAS 1 contains Implementation
Guidance. Ind AS 1 does not include
the same because various enactments
have prescribed formats,e.g., Schedule
VI to the Companies Act, 1956.
2. Ind AS 7, Statement of Cash Flows
1. In case of other than fnancial entities,
IAS 7 gives an option to classify the
interest paid and interest and dividends
received as item of operating cash
fows. Ind AS 7 does not provide such an
option and requires these items to be
classifed as items of fnancing activity
and investing activity, respectively.
2. IAS 7 gives an option to classify the
dividend paid as an item of operating
activity. However, Ind AS 7 requires it
to be classifed as a part of fnancing
activity only.
3. Ind AS 8, Accounting Policies,
Changes in Accounting Estimates and
Errors
Ind AS 8 has been amended to provide
that in absence of specifc Ind AS
on the subject, management may
also frst consider the most recent
pronouncements of International
Accounting Standards Board and in
absence thereof those of the other
standard-setting bodies that use
a similar conceptual framework to
develop accounting standards, other
accounting literature and accepted
industry practices.
4. Ind AS 16, Property, Plant and
Equipment
Language of paragraph 8 has been
changed to clarify more precisely that
servicing equipment also qualifes as
property, plant and equipment when an
entity expects to use them during more
than one period.
5. Ind AS 19, Employee Benefts
1. According to Ind AS 19 the rate to
be used to discount post-employment
beneft obligation shall be determined
by reference to the market yields on
government bonds, whereas under IAS
19, the government bonds can be used
only where there is no deep market of
high quality corporate bonds.
2. To illustrate treatment of gratuity
subject to ceiling under Indian Gratuity
Rules, an example has been added in
Ind AS 19.
3. IAS 19 permits various options for
treatment of actuarial gains and losses
for post- employment defned beneft
plans whereas Ind AS 19 requires
recognition of the same in other
comprehensive income, both for post-
employment defned beneft plans and
other long-term employment beneft
plans. The actuarial gains recognised
in other comprehensive income should
be recognised immediately in retained
earnings and should not be reclassifed
to proft or loss in a subsequent period.
6. Ind AS 20, Accounting for
Government Grants and Disclosure of
Government Assistance
1. IAS 20 gives an option to measure
non-monetary government grants either
at their fair value or at nominal value.
Ind AS 20 requires measurement of
such grants only at their fair value. Thus,
the option to measure these grants at
nominal value is not available under Ind
AS 20.
2. IAS 20 gives an option to present
the grants related to assets, including
non-monetary grants at fair value in
the balance sheet either by setting
up the grant as deferred income or
by deducting the grant in arriving at
the carrying amount of the asset. Ind
AS 20 requires presentation of such
grants in balance sheet only by setting
up the grant as deferred income. Thus,
the option to present such grants by
deduction of the grant in arriving at
the carrying amount of the asset is not
available under Ind AS 20.
7. Ind AS 21, The Effects of Changes in
Foreign Exchange Rates
1. When there is a change in functional
currency of either the reporting currency
or a signifcant foreign operation, IAS
21 requires disclosure of that fact
and the reason for the change in
functional currency. Ind AS 21 requires
an additional disclosure of the date of
change in functional currency.
2. The following examples have been
included in Ind AS 21, The Effects of
Changes in Foreign Exchange Rates, as
Appendix B:
1) An example to clarify the provisions of
paragraph 14.
2) An example to clarify impairment loss
in Paragraph 25.
3) An example to clarify paragraphs 33
and 37.
4) The date of change of functional
currency should also be disclosed in
paragraph 57.
8. Ind AS 23, Borrowing Costs
IAS 23 provides no guidance as to how
the adjust-ment prescribed in paragraph
6(e) is to be deter-mined. Ind AS 23
provides guidance in this regard.
9. Ind AS 24, Related Party Disclosures
1. In Ind AS 24, disclosures which confict
with confdentiality requirements of
statute/regulations are not required to
be made since Accounting Standards
cannot override legal/regulatory
requirements.
2. Paragraph 24A (reproduced below)
has been included in the Ind AS 24.
It provides additional clarifcatory
guidance regarding aggregation of
transactions for disclosure.
24A Disclosure of details of particular
transactions with individual related
parties would frequently be too
voluminous to be easily understood.
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Accordingly, items of a similar nature
may be disclosed in aggregate by type
of related party. However, this is not
done in such a way as to obscure the
importance of signifcant transactions.
Hence, purchases or sales of goods are
not aggregated with purchases or sales
of fxed assets. Nor a material related
party transaction with an individual
party is clubbed in an aggregated
disclosure.
3. In the defnition of the close members
of the family of a person, relatives as
specifed under the meaning of relative
under the Companies Act, 1956, has
been included.
10. Ind AS 27, Consolidated and
Separate Financial Statements
1. Paragraphs 8, 10 and 42 have
been deleted and paragraphs 9, 11,
39 and 43 have been modifed as the
applicability or exemptions to the Indian
Accounting Standards is governed by
the Companies Act and the Rules made
thereunder.
2. A sentence has been added in
paragraph 9 of Ind AS 27, Consolidated
and Separate Financial Statements
requiring that for companies the form
of consolidated fnancial statements as
given in Appendix C to this standard shall
be applied to the extent circumstances
admit.
11. Ind AS 29, Financial Reporting in
Hyperinfation- ary Economies
Ind AS 29 requires an additional
disclosure regarding the duration of the
hyperinfationary situation existing in
the economy.
12. Ind AS 33, Earnings per Share
1. IAS 33 provides that when an entity
presents both consolidated fnancial
statements and separate fnancial
statements, it may give EPS related
information in consolidated fnancial
statements only, whereas, the Ind AS 33
requires EPS related information to be
disclosed both in consolidated fnancial
statements and separate fnancial
statements.
2. Paragraph 2 of IAS 33 requires that
the entire standard applies to :
(a) the separate or individual fnancial
statements of an entity:
(i) whose ordinary shares or potential
ordinary shares are traded in a public
market (a domestic or foreign stock
exchange or an over-the-counter market,
including local and regional markets) or
(ii) that fles, or is in the process of
fling, its fnancial statements with a
Securities Regulator or other regulatory
organisation for the purpose of issuing
ordinary shares in a public market; and
(b) the consolidated fnancial statements
of a group with a parent:
(i) whose ordinary shares or potential
ordinary shares are traded in a public
market (a domestic or foreign stock
exchange or an over-the-counter
market, including local and regional
markets) or
(ii) that fles, or is in the process of
fling, its fnancial statements with a
Securities Regulator or other regulatory
organisation for the purpose of issuing
ordinary shares in a public market.
It also requires that an entity that
discloses earnings per share shall
calculate and disclose earnings
per share in accordance with this
Standard.
The above have been deleted in the Ind
AS as the applicability or exemptions
to the Indian Accounting Standards is
governed by the Companies Act and the
Rules made there under.
3. Paragraph 4 has been modifed in
Ind AS 33 to clarify that an entity shall
not present in separate fnancial sta
tements,earningspersharebasedont
heinformation given in consolidated
fnancial statements, besides requiring
as in IAS 33, that earnings per share
based on the information given in
separate fnancial statements shall
not be presented in the consolidated
fnancial statements.
4. In Ind AS 33, a paragraph has been
added after paragraph 12 on the
following lines -
Where any item of income or expense
which is otherwise required to be
recognised in proft or loss in accordance
with accounting standards is debited or
credited to securities premium account/
other reserves, the amount in respect
thereof shall be deducted from proft or
loss from continuing operations for the
purpose of calculating basic earnings
per share.
5. In Ind AS 33 paragraph 15 has
been amended by adding the phrase,
irrespective of whether such discount
or premium is debited or credited to
securities premium account to further
clarify that such discount or premium
shall also be amortised to retained
earnings.
13. Ind AS 34, Interim Financial
Reporting
A footnote has been added to paragraph
1of Ind AS 34, Interim Financial
Reporting that Unaudited Financial
Results required to be prepared and
presented under Clause 41 of Listing
Agreement with stock exchanges is not
an Interim Financial Report as defned
in paragraph 4 of this Standard.
14. Ind AS 40, Investment Property
IAS 40 permits both cost model and fair
value model (except in some situations)
for measurement of investment
properties after initial recognition. Ind
AS 40 permits only the cost model.
15. Ind AS 101 First-time Adoption of
1. Paragraph 3 of Ind AS 101 specifes
that an entitys frst Ind AS fnancial
statements are the frst annual
fnancial statements in which the entity
adopts Ind ASs in accordance with
Ind ASs notifed under the Companies
Act, 1956 whereas IFRS 1 provides
various examples of frst IFRS fnancial
statements.
2. Paragraph 4 of IFRS 1 provides
various examples of instances when an
entity does not apply this IFRS. Ind AS
101 does not provide the same.
3. IFRS 1 requires specifc disclosures
if the entity provides non-IFRS
comparative information and historical
summaries. Such disclosures are not
required under Ind AS 101.
16. Ind AS 103, Business Combinations
IFRS 3 excludes from its scope business
combinations of entities under common
control. Appendix C of Ind AS 103 gives
guidance in this regard.
Notes:
1. Differences between Indian
Accounting Standards (Ind-ASs)
and corresponding IFRSs are given
in Appendix 1 at the end of each
Indian Accounting Standard.
2. Apart from the changes in IFRSs
as a result of carve- outs and other
changes as described in above
section, changes consequential
thereto have also been made in all
Ind ASs, wherever required.
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Iv. Comparison of IFRS as applicable on 1
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April 2011 with Ind AS, placed at MCAs website
S
No.
IFRS /
IAS No.
Corresponding
Indian Accounting
Standard
Name
1. IAS 1 Ind AS 1 Presentation of Financial Statements
2. IAS 2 Ind AS 2 Inventories
3. IAS 7 Ind AS 7 Statement of Cash Flows
4. IAS 8 Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors
5. IAS 10 Ind AS 10 Events after the Reporting Period
6. IAS 11 Ind AS 11 Construction Contracts
7. IAS 12 Ind AS 12 Income Taxes
8. IAS 16 Ind AS 16 Property, Plant and Equipment
9. IAS 17 Ind AS 17 Leases
10. IAS 18 Ind AS 18 Revenue
11. IAS 19 Ind AS 19 Employee Benefts
12. IAS 20 Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance
13. IAS 21 Ind AS 21 The Effects of Changes in Foreign Exchange Rates
14. IAS 23 Ind AS 23 Borrowing Costs
15. IAS 24 Ind AS 24 Related Party Disclosures
16. IAS 26 * Accounting and Reporting by Retirement Beneft Plans
17. IAS 27 Ind AS 27 Consolidated and Separate Financial Statements
18. IAS 28 Ind AS 28 Investments in Associates
19. IAS 29 Ind AS 29 Financial Reporting in Hyperinfationary Economies
20. IAS 31 Ind AS 31 Interests in Joint Ventures
21. IAS 32 Ind AS 32 Financial Instruments: Presentation
22. IAS 33 Ind AS 33 Earnings per Share
23. IAS 34 Ind AS 34 Interim Financial Reporting
24. IAS 36 Ind AS 36 Impairment of Assets
25. IAS 37 Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
26. IAS 38 Ind AS 38 Intangible Assets
27. IAS 39 Ind AS 39 Financial Instruments: Recognition and Measurement
28. IAS 40 Ind AS 41 Investment Property
29. IAS 41 ** Agriculture
30. IFRS 1 Ind AS 101 First-time Adoption of Indian Accounting Standards
31. IFRS 2 Ind AS 102 Share based Payment
32. IFRS 3 Ind AS 103 Business Combinations
33. IFRS 4 Ind AS 104 Insurance Contracts
34. IFRS 5 Ind AS 105 Non current Assets Held for Sale and Discontinued Operations
35. IFRS 6 Ind AS 106 Exploration for and Evaluation of Mineral Resources
36. IFRS 7 Ind AS 107 Financial Instruments: Disclosures
37. IFRS 8 Ind AS 108 Operating Segments
38. IFRS 9 *** Financial Instruments
* Ind AS corresponding to IAS 26 Accounting and Reporting by Retirement Beneft Plans has not been placed on MCAs website
as this standard is not applicable to companies
** Ind AS corresponding to IAS 41, Agriculture, is being redrafted.
*** It has been decided that Ind AS corresponding to IFRS 9, Financial Instruments, should not be issued since it was felt that it was
incomplete; instead of this standard, Ind AS 39 has been issued.
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Comparison of IFRICs/SICs as applicable on 1
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April 2011 with corresponding Appendices to Ind ASs
S
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IFRIC/
SIC No.
Corresponding Appendix
included in Ind AS
IFRIC/SIC
1. IFRIC 1 Appendix A to Ind AS 16 Changes in Existing Decommissioning, Restoration and Similar Liabilities
2. IFRIC 2 # Members Shares in Co operative Entities and Similar Instruments
3. IFRIC 4 Appendix C to Ind AS 17 Determining whether an Arrangement contains a Lease
4. IFRIC 5 Appendix A to Ind AS 37
Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
5. IFRIC 6 Appendix B to Ind AS 37
Liabilities arising from Participating in a Specifc Market Waste Electrical and
Electronic Equipment
Applying the Restatement Approach under Ind AS 29 Financial Reporting in
Hyperinfationary Economies
7. IFRIC 9 Appendix C to Ind AS 39 Reassessment of Embedded Derivatives
8. IFRIC 10 Appendix A to Ind AS 34 Interim Financial Reporting and Impairment
9. IFRIC 12 Appendix A to Ind AS 11 Service Concession Arrangements
10. IFRIC 13 Appendix B to Ind AS 18 Customer Loyalty Programmes
Ind AS 19 The Limit on a Defned Beneft Asset, Minimum Funding
Requirements and their Interaction
12. IFRIC 15 ## Agreements for the Construction of Real Estate
13. IFRIC 16 Appendix D to Ind AS 39 Hedges of a Net Investment in a Foreign Operation
14. IFRIC 17 Appendix A to Ind AS 10 Distributions of Non-cash Assets to Owners
15. IFRIC 18 Appendix C to Ind AS 18 Transfers of Assets from Customers
16. IFRIC 19 Appendix A to Ind AS 32 Extinguishing Financial Liabilities with Equity Instruments
17. SIC-7 ### Introduction of Euro
18. SIC-10 Appendix A to Ind AS 20 Government AssistanceNo Specifc Relation to Operating Activities
19. SIC-12 Appendix A to Ind AS 27 ConsolidationSpecial Purpose Entities
20. SIC-13 Appendix A to Ind AS 31 Jointly Controlled Entities Non-Monetary Contributions by Venturers
21. SIC-15 Appendix A to Ind AS 17 Operating LeasesIncentives
22. SIC- 21 Appendix A to Ind AS 12 Income TaxesRecovery of Revalued Non-Depreciable Assets
23. SIC-25 Appendix B to Ind AS 12 Income TaxesChanges in the Tax Status of an Entity or its Shareholders
24. SIC-27 Appendix B to Ind AS 17 Evaluating the Substance of Transactions Involving the Legal Form of a Lease
25. SIC-29 Appendix B to Ind AS 11 Service Concession Arrangements: Disclosures
26. SIC-31 Appendix A to Ind AS 18 RevenueBarter Transactions Involving Advertising Services
27. SIC-32 Appendix A to Ind AS 38 Intangible AssetsWeb Site Costs
# Appendix corresponding to IFRIC 2 is not issued as it is not relevant for the companies
## On the basis of principles of the IAS 18, IFRIC 15 on Agreement for Construction of Real Estate prescribes that construction of
real estate should be treated as sale of goods and revenue should be recognised when the entity has transferred signifcant
risks and rewards of ownership and retained neither continuing managerial involvement nor effective control. IFRIC 15 has not
been included in Ind AS 18 to scope out such agreements and to include the same in Ind AS 11, Construction Contracts
### Appendix corresponding to SIC 7 is not issued as it is not relevant in the Indian context.
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when I despair, I remember that all through history the ways of truth and love have always won. There have been
tyrants, and murderers, and for a time they can seem invincible, but in the end they always fall. Think of it--always.
- Mahatma Gandhi
A PEEP INTO IND AS 19: THE NEw wAY FOR PENSION LIABILITY
MEASURES AND DISCLOSURES
By R Arunachalam FIA ; FIAI and
Nasrat Kamal FIA ; FIAI
I
ntroduction
The requirement for a uniform
accounting framework across the
world, the emergence of International
Financial Reporting Standards (IFRS)
and its growing signifcance has been
phenomenal during the past few years.
In pursuance of this requirement, India
has started the process of convergence
of Indian Accounting Standards with
IFRS.
The International Accounting Standards
Board (IASB) is an independent, privately
funded accounting standard setter
based in London. The IASB was founded
on 1 April 2001 as the successor to
the International Accounting Standards
Committee (IASC).
International Financial Reporting
Standards (IFRS) are principles
based Standards, Interpretations and
Framework developed, adopted and
promoted for use and application
across various companies.
IASB is responsible for setting the
IFRS. Many of the standards forming
part of IFRS are known by the older
name of International Accounting
Standards (IAS). IASs were issued
between 1973 and 2001 by the
erstwhile IASC. The IASB adopted all
these existing IASs in its frst meeting
and continued to develop new
standards calling them as IFRS.
IFRS are used in many parts of the world,
including the European Union, Hong
Kong, Australia, Malaysia, Pakistan, Gulf
Countries, Russia, South
Africa, Singapore and Turkey. As of
2008, more than 113 countries around
the world, including all of Europe
require or permit IFRS reporting. The
Securities and Exchange Commission
(SEC) in the US is slowly but
progressively shifting from requiring
only US Generally Accepted Accounting
Principles (US GAAP) to accepting
IFRS and will most likely accept IFRS
standards in the long term.
It is expected that IFRS adoption
worldwide will be benefcial to investors
and other users of fnancial statements,
by reducing the costs of comparing
alternative investments and increasing
the quality of information. Companies
are also expected to beneft, as investors
will be more willing to provide fnancing.
IndianotifesIndAS19
The Institute of Chartered Accountants
of India (ICAI), set up by an Act of
Parliament in 1949, is a statutory body
aimed at regulating the profession of
Chartered Accountants in India. The
ICAI is also responsible for specifying
and recommending the accounting
standards to be followed by companies
conducting business in India. While
formulating accounting standards,
the ICAI takes into consideration the
applicable laws, customs, usages and
business environment prevailing in the
country.
As per the Companies Act, 1956, ICAI
would recommend the accounting
standards which may then be prescribed
by the Central Government in consultation
with the National Advisory Committee
on Accounting Standards (NACAS) for
adoption by companies. The section
further clarifes that the accounting
standards specifed by the ICAI shall be
deemed to be the accounting standards
until such prescription by the Central
Government.
The Central Government constituted
the National Advisory Committee on
Accounting Standards (NACAS) in 2001.
The NACAS have been reviewing the
accounting standards and working
closely with the ICAI since its constitution.
The accounting standards specifed
by the ICAI were deemed to be the
accounting standards until 2006,
by when the Ministry of Corporate
Affairs started notifying the prescribed
accounting standards in consultation
with NACAS.
The Ministry of Corporate Affairs (MCA)
notifed thirty fve Indian Accounting
Standards, referred to as Ind AS, on
25 February 2011 as part of the IFRS
convergence process. The MCA will
implement the IFRS converged Indian
Accounting Standards in a phased
manner after various issues including
tax related issues are resolved with the
concerned departments. It would be
ensured that the implementation of the
converged standards is smooth for all
the stakeholders.
The date of implementation of the Ind
AS will be notifed by the MCA at a later
date. Although the MCA is yet to fnalize
and declare the exact implementation
date/s, notifcation of Ind AS is a
signifcant step towards convergence
with IFRS.
In the ensuing sections of this article, we
have atempted to capture the synopsis
of areas of divergence between Ind AS
19 as notifed by the MCA, the existing
standard AS 15 (rev 2005) as adopted
by ICAI and the existing International
Accounting Standard IAS 19 as adopted
by IASB. We have also included the Ind
AS 19 impact for the companies and the
role of the Actuarial Profession.
Ind AS 19 changes from the existing
standard AS 15 (revised 2005)
ICAI issued the existing Accounting
Standard AS 15 (revised 2005) in March
2005 effective from accounting periods
commencing on or after 1 April 2006.
This existing standard was regarded as an
improvement over the earlier standard.
It is a market based standard that
measures employee beneft liabilities on
a basis that is consistent with fnancial
markets. The Table 1 summarizes the
key changes from this existing standard.
Table1DifferencesbetweenIndAS19andexistingstandardAS15(revised2005)
Constructive Obligations Ind AS 19 covers employee benefts arising from constructive obligations. The existing standard does
not deal explicitly with the same. (Paragraph 3(c) of Ind AS 19)
Employees include all Direc-
tors
As per the existing standard the term employee includes only whole time directors whereas under Ind
AS 19, the term includes directors. (Paragraph 6 of Ind AS 19)
Changes in Defnitions The defnitions of short-term employee benefts, other long-term employee benefts, and return on plan
assets and past service cost as per the existing standard have been changed in Ind AS 19. (Paragraph
7 of Ind AS 19)
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Multi-Employer Plan and
Contractual Agreement
Ind AS 19 deals with situations where there is a contractual agreement between a multi-employer plan
and its participants that determine how the surplus in the plan will be distributed to the participants (or
the defcit funded). The existing standard does not deal with it. (Paragraph 32A of Ind AS 19)
Multi-Employer Plan and
Contingent Liabilities
Cross-reference to recognition of, or disclosure of information, of contingent liabilities (under AS 29), in
the case of multi-employer plans, appearing in the existing standard has been amended in Ind AS 19
as disclosure only, since, contingent liabilities should not be recognized (under Ind AS 37). (Paragraph
32 B of Ind AS 19)
Entities under Common
Control
As per Ind AS 19, participation in a defned beneft plan sharing risks between various entities under
common control is a related party transaction for each group entity and some disclosures are required
in the separate or individual fnancial statements of an entity. The existing standard does not contain
similar provisions. (Paragraph 34 B of Ind AS 19)
Actuarys Involvement Ind AS 19 encourages (but does not require) an entity to involve a qualifed actuary in the measurement
of all material postemployment beneft obligations. The existing standard though does not require in-
volvement of a qualifed actuary, does not specifcally encourage the same. (Paragraph 57 of Ind AS 19)
Asset Ceiling As per Ind AS 19, one of the limits for asset ceiling is the total of (i) any cumulative unrecognized past
service cost and (ii) the present value of economic benefts available in the form of refunds from the
plan or reductions in future contributions to the plan. As per the existing standard, the said limit is only
(ii) as above. (Paragraph 58(b) of Ind AS 19)
Financial Assumptions Ind AS 19 makes it clear that fnancial assumptions shall be based on market expectations at the end
of the reporting period (for the period over which the obligations are to be settled). The existing stand-
ard does not clarify the same. (Paragraph 77 of Ind AS 19)
Negative Past Service Cost Ind AS 19 clarifes that negative past service cost arises when an entity changes the benefts attribut-
able to past service so that the present value of the defned beneft obligation decreases. The existing
standard does not clarify the same. (Paragraph 97 of Ind AS 19)
Curtailments Ind AS 19 provides the following clarifcations in the context of curtailments. (i) A curtailment may
arise from a reduction in the extent to which future salary increases are linked to the benefts payable
for past service. (ii) When a plan amendment reduces benefts, only the effect of reduction for future
service is a curtailment. The effect of any reduction for past service is a negative past service cost. The
existing standard does not provide these clarifcations.
Further Ind AS 19 requires demonstrable commitment in respect of reduction in the number of employ-
ees as against the requirement of present obligation in the existing standard. Also, the terms mate-
rial reduction in the number of employees and material element of future service appearing in the ex-
isting standard have been replaced by the terms signifcant reduction in the number of employees and
signifcant element of future service respectively in Ind AS 19. (Paragraph 111 and 111 A of Ind AS 19)
Termination Benefts Ind AS 19 provides more guidance on timing of recognition of termination benefts. The measurement
criteria have also been expanded to deal with voluntary redundancy. The recognition criteria under the
revised standard differ from the criteria prescribed in the existing standard. (Paragraphs 133, 134 and
140 of Ind AS 19)
Recognition of Actuarial
Gains and Losses
Ind AS 19 requires recognition of the actuarial gains and losses in other comprehensive income, which
in turn to be immediately recognized in retained earnings. They should not be reclassifed as proft or
losses in a subsequent period. The existing standard requires the recognition of the actuarial gains and
losses immediately in the statement of proft and loss as income or expense. (Paragraphs 92 and 93
of Ind AS 19)
Defned Beneft Asset /
Minimum Funding Require-
ment
Appendix A of Ind AS19 provides guidance on the Limit on a Defned Beneft Asset, Minimum Funding
Requirements and their Interaction. This provision compares with the IFRIC 14 of the IASB. This guid-
ance is not available in the existing standard. (Appendix A of Ind AS 19)
Inter Valuation Period The existing standard says that the detailed actuarial valuation may be made at intervals not exceeding
three years unlike Ind AS 19.
Ind AS 19 Impact for the Companies
The above changes and clarifcations in
the Ind AS 19 will help the companies
improve their disclosure and better align
with their IAS 19 reporting if any. The
signifcant impact for the companies
would be:
Inclusion of Directors: The
companies would now need to
include part time directors. Though
they could be few in numbers, their
pension cost could be signifcant.
This would increase the expense
and the net liability provisions.
Actuarial Gains and Losses: The
actuarial gains and losses will now
be immediately recognized in the
other comprehensive income and
not fow into the proft and loss. This
will remove the volatility in the proft
and loss which in turn improves
the credibility and understanding
of the fnancial statements by
the investors. This will also help
achieve closer compatibility with the
amended IAS 19 as the amended
standard has similar provisions. The
other comprehensive income would
be adjusted against the retained
earnings and the net liability
provisions in the balance sheet
would not change.
Termination Benefts: The timing of
recognition of termination benefts
including voluntary redundancy
could potentially impact the
expenses if there is a termination or
redundancy plan.
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Asset Ceiling: The cumulative
unrecognized past service cost
could now be included in the assets
which could potentially lower the net
liability for companies who have such
a provision.
The impact would be uniform across all
the sectors of the business. However the
impact would be higher for companies
who have consistently and signifcantly
under / overestimated their assumptions
such as salary increases or withdrawals.
The actuarial gains or losses from such
an under / overestimation will not fow
through the proft or loss as per Ind AS
19 and hence would have a signifcant
impact in their reported proft or loss
fgures.
IndAS19comparisonwiththeexisting
standard IAS 19
IASB issued the accounting standard
IAS 19 for Employee Benefts originally
in 1983. This has been amended
subsequently many times, the last
signifcant amendments being in
December 2004 and June 2011. IAS
19 applies to all employee benefts
offered by an employer to employees
and their dependents and benefciaries.
The Table 2 captures the signifcant
differences between Ind AS 19 as
notifed by the MCA and the existing
standard IAS 19 in practice (before June
2011 amendment).
Table 2 Differences between Ind AS 19 and IAS 19 (before June 2011 amendment)
Topic Ind AS 19 IAS 19
Actuarial Gains and
Losses
Ind AS 19 provides a single option for recognition of
actuarial gains and losses for both post-employment
defned beneft plans and other long-term employment
beneft plans.
Other Comprehensive Income Recognition
IAS 19 permits various options for treatment of
actuarial gains and losses for post-employment defned
beneft plans.
Proft or Loss Recognition Corridor Approach *
Proft or Loss Recognition Faster than Corridor
Approach *
Other Comprehensive Income Recognition
*removed in the amended IAS 19 effective from
January 2013
Discount Rate The discount rate to be determined by reference to the
market yields at the end of the reporting period on gov-
ernment bonds.
The discount rate to be determined by reference to
market yields at the end of the reporting period on high
quality corporate bonds.
In countries (such as India) where there is no deep
market in such bonds, the discount rate could be
determined by reference to government bonds.
Transitional Provi-
sions
Transitional Provisions does not form part of Ind AS 19.
This has been included in Ind AS 101 wherever appro-
priate.
Transitional Provisions forms part of IAS 19. **
**removed in the amended IAS 19 effective from
January 2013 as the same has been included in IFRS 1
wherever appropriate.
Gratuity Example An example has been added in paragraph 70 to illus-
trate treatment of gratuity subject to ceiling under In-
dian Gratuity Rules
No such example provided.
Equivalent
Terminology
Balance Sheet
Statement of Proft or Loss
Approval of fnancial statements for issue
Statement of Financial Position
Statement of Other Comprehensive Income
Authorization of fnancial statements for issue
IASB amends IAS 19 effective January 2013
As mentioned earlier, IASB has amended the standard in June 2011 which will be effective from January 2013. The earlier
adoption is as usual encouraged. The signifcant changes are as provided in Table 3.
Table 3 Amendments made in IAS 19 (effective January 2013)
Recognition of actuarial
gains and losses
(remeasurements)
Actuarial gains and losses are renamed as remeasurements and will be recognized immediately in other
comprehensive income. This means, they will be no longer deferred using the corridor approach or
recognized in proft and loss. Remeasurements recognized in other comprehensive income shall not be
recycled through proft or loss in subsequent periods.
Recognition of past
service cost /
curtailment
Past service costs will be recognized in the period of a plan amendment; unvested benefts will no
longer be spread over a future service period. A curtailment now occurs only when an entity reduces
signifcantly the number of employees. Curtailment gains / losses are accounted as past service costs.
Measurement of Pension
Expense
Annual expense for a funded beneft plan will include net interest expense or income calculated by
applying the discount rate to the net defned beneft asset or liability. This will replace the fnance charge
and expected return on plan assets.
Presentation in the
Income Statement
There will be less fexibility in the income statement presentation. Beneft cost will be split between (i)
cost of the benefts accrued in the current period (service cost) and beneft changes (past service cost,
settlements and curtailments) and (ii) fnance expense or income.
Other Changes The proposed amendment also includes changes to Risk Sharing, Multi-Employer Plan disclosure, Taxes
and Administration costs and Termination benefts.
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The Role of the Actuarial Profession
The Actuarial Profession is heavily
involved and engaged in the
development of these new oonverged
standards at both the global and various
national levels. The actuarial bodies in
various countries are currently:
Lngaging with the oorresponding
accounting bodies in their countries
to seek ways of promoting
oonvergenoe at the operational level
Lnsuring oompatibility between
tnanoial reporting standards
and other regulatory / solvenoy
standards for easy and effective
investor understanding
Lnsuring equivalent produots
offered by different types of tnanoial
institutions have similar tnanoial
reporting treatment
Ueveloping aotuarial standards
of praotioe for their members to
oomply with at both the polioy and
operational level
The International Actuarial Association
(lAA) has formed a working party to
assist inputs to the Private 3eotor
Taskforce of Regulated Professions
and lndustries (P31l) in May 2011.
The Private Sector Taskforce of
Regulated Professions and Industries
(P31l) was established in May 2011 at
the request of Presidenoy of the 020.
lAA is a part of the P31l whioh oomprises
of representatives from private seotor
organizations of professions inoluding
IASB and industries that are subject
to regulation, and operate within the
tnanoial seotor.
1he taskforoe aims to provide 020
an analysis of the development of
tnanoial polioy and regulation to
facilitate economic stability in the
global markets. lt will speoitoally foous
on the critical issue of global regulatory
convergence. The PSTF has released
an interim report in 1une 2011 and a
tnal report is due in 3eptember 2011.
1he lAA is also working on new standards
of aotuarial praotioe, inoluding an
lA3 19 speoito standard. 1he bodies
represented in the taskforoe, like the
lAA, oan't impose standards on their
member organisations - oonvergenoe
of standards depends on their voluntary
take up in the jurisdiotions. owever
this initiative is a good opportunity for
the aotuaries' voioe to be heard on
convergence.
The Institute of Actuaries of India
(IAI) has nominated volunteers for
the above lAA working party in the
Pensions and Lmployee Benetts
arena. 1he lAl is working olosely with
the Institute of Chartered Accountants
of lndia (lCAl) in this aspeot and
have also formed a working group to
redraft the existing Aotuarial Praotioe
standard APS26: Actuarial Reports
under Accounting Standard 15
(Revised, 2005) issued by the Institute
of Chartered Accountants of India to
oomply and provide framework for
aotuarial report for the proposed lnd
A3 19. .
Conclusion
1he notitoation of lnd A3 is an important
step towards the oonvergenoe of llR3
in lndia. owever, before the aotual
implementation of these standards,
regulatory bodies need to take certain
further actions including regulatory
ohanges in the Companies Aot. lnd A3
has eliminated signitoant differenoes
from the IFRS. It can be said that
applioation of lnd A3 would ensure
minimal departures from the llR3
though it may be praotioally diftoult to
make an assertion of llR3 oomplianoe
given the differenoes that exist. 1his
would enhanoe the understandability of
the lnd A3 tnanoial statements by global
investors. 1he oompanies oan also
simultaneously prepare the tnanoial
statements pertaining to lnd A3 and
llR3 with minimal effort and impaot.
The global convergence of accounting
standards will provide a level playing
teld, avoid unwarranted oosts,
provide transparent information,
avoid regulatory arbitrage, and reduce
oomplianoe and operational risks both at
the domestio as well as the international
level. owever there oould be situations
where the differenoes in geographioal,
polity, oultural, behavioral, market and
others aoross nations would make the
oomplete uniformity neither praotioable
nor desirable. During these situations,
convergence of outcomes could be
prioritized over the oonvergenoe of the
standards.
About the authors:
R Arunachalam is a Consulting Actuary
in the Insurance and Pensions area
based out of Chennai.
Nasrat Kamal is a Consulting Actuary in
the Insurance and Pensions area based
out of Bengaluru.
arun.aotuarygmail.oom
nasrat.kamalgmail.oom.
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SOLvENCY II UPDATE - RESULTS OF qIS5
By Gautam Kakar
S
olvency II is a long-term project
that started more than ten years
ago in EU with an objective to build
a reference regulatory framework
that will apply both in normal and
crisis circumstances. The design of
the framework relies on technical
provisions which allow undertakings
to meet their commitments towards
policyholders arising from the (re)
insurance activity (i.e. the expected
obligations), and capital requirements
which should cover unexpected losses
over a one-year time horizon.
As part of the Solvency II project, a
number of large scale feld-testing
exercises, so-called Quantitative
Impact Studies (qIS), were carried
out.So far fve such studies have been
carried out, the latest one being qIS 5
which was carried out in second half
of 2010. QIS exercises are crucial to
the development of EU regulation and
are essential to ensure that Solvency
II is designed after consultation with
insurance industry, with suffcient
evidence of the impact of the regime
proposed. It must be emphasized that
QIS5isafeldtestandnotaproposal
forthefnalSolvencyIIframework.
The ffth Quantitative Impact Study
(qIS5) takes into account a number
of lessons learned from the recent
fnancial crisis. European Insurance
and Occupational Pensions Authority
(EIOPA) published the much awaited
results of qIS5 on 14th March, 2011.
Objectives of qIS 5
The QIS5 exercise was carried out with
the following objectives:
To provide all stakeholders with detailed
information on the quantitative impact on
insurers and reinsurers solvency balance
sheets of the introduction of delegated
acts under Solvency II compared to the
situation under Solvency I;
To check that the technical specifcations
are aligned with the principles and
calibration targets (including calibration
of standard formula) set out in the level 1
Framework Directive Proposal;
To encourage insurers, reinsurers and
supervisors to prepare for the introduction
of Solvency II and to identify areas where
their internal processes, procedures and
infrastructure may need to be enhanced;
and in particular, to encourage insurers
and reinsurers to improve their data
collection processes;
To provide a starting point for an ongoing
dialogue between supervisors and
insurers and reinsurers in preparation for
the new supervisory system.
The fndings of QIS5 will feed into the
ongoing and future work for the delegated
acts that will put into practice the
Solvency II Level 1 Framework Directive.
Key Findings
Participation
In total, 2,520 (re)insurers as well
as 167 groups participated in this
study, compared to 1,412 and 106
respectively in QIS4. In total, more than
95% of technical provisions and 85%
of premiums of the insurers subject
to Solvency II were covered by the test.
On an average, for the frms in the UK,
12.2 person-months were spent by a life
insurer and 7.4 person-months by a non-
life insurer on QIS5 exercise. For Solvency
II as a whole the estimated average
resource requirement for UK frms is
591.5 person-months for a life insurer
and 357.7 person-months for a non-life
insurer. The resource requirement for
life business is generally higher due to
its complexity and long term nature of
business. In terms of the key areas of
focus for preparation, almost all countries
cited ensuring adequate quantity and/
or quality of resource. The need for
actuarial resources was particularly
highlighted, with risk management
professionals also being mentioned.
Conducting a gap analysis was seen as
an important step in their preparations
along with a detailed project plan.
Alignment of existing processes with the
Solvency II requirements and changes
to organisational structure were seen as
some of the steps required
is largely explained by the impact of
the fnancial crisis on the valuation of
the assets owned by the sector. At the
end of 2009, the capital surplus of the
insurance and reinsurance industry
totalled around 500bn compared to
over 600bn at the end of 2007. The
results of QIS5 are also driven by the
fundamental difference of valuation of
the balance sheet and the meaning of the
solvency requirements under Solvency
II, which led to an increase in capital
requirements, a decrease in technical
provisions and a relative increase in the
amount of eligible own funds. Taking into
account these elements, the fnancial
position of the European (re)insurance
sector assessed against the QIS5
solvency capital requirements calculated
in accordance with the standard formula
or internal models remains comfortable
with eligible own funds in excess of the
regulatory requirements by 395bn. This
amounts to a decrease of the surplus of
56bn compared to the current regime.
Generally, across all solo respondents the
SCR results obtained by using an internal
model were very close to those derived by
applying the standard formula. The most
signifcant difference between standard
formula and (partial) internal model
results was observed among groups.
Groups internal model results showed
a capital requirement of about 0.8 times
the size of the capital requirement based
on the standard formula calculation.
At European level, 15% of the participants
did not fully cover the SCR, which would
trigger regulatory action. Fewer than 9%
of participants covered 75% or less of
the SCR. A quarter of those undertakings
belong to insurance groups or fnancial
conglomerates for which a capital
reallocation or intra-group risk transfers
would be available as a means for raising
their capital level. 4.6% of participants
across Europe were unable to meet the
MCR requirement., which would trigger
the most serious intervention from the
supervisor, the withdrawal of the license.
1.3% of all participants have a shortfall
greater than 50% of the MCR. Overall,
0.6% of all participating undertakings
had negative own funds according to the
QIS5 valuation principles.
Three main drivers explain the changes
in the surplus from the current regime to
the Solvency II framework:
- shift from the current balance sheet
to the harmonised Solvency II balance
sheet;
- shift from the current requirements
to the harmonised Solvency II capital
requirements; and
All Number
affected
by Sol II
qIS5
particulars
(% of
number
affected)
Life 888 799 76%
Non-Life 2,681 1,879 68%
Reinsurer 203 187 61%
Captive 393 353 50%
Composite 588 467 72%
Total 4,753 3,680 68%
Financial Impact ( in terms of surplus,
SCR and MCR)
Since 2007 - the basis for the previous
QIS4 exercise - the fnancial surplus of
the insurance sector, calculated under
Solvency I rules (i.e. neutral of any
Solvency II implications) has decreased
markedly in 2008 (minus 200bn),
and was followed by partial recovery in
2009 - which constitutes the basis for
the current QIS5 exercise. This evolution
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- differences in the own funds elements
allowed to cover the requirements.
On the liability side, the removal of the
prudence in existing technical provisions
had a far greater impact (66%) than
the revaluation upward of some best
estimates (-15%). The increase in
capital requirements going from the
Required Solvency Margin (RSM) to the
SCR amounted to 59% of the Solvency I
surplus.
The sum of all risks modelled under
the SCR requirements calculated using
the standard formula or full or partial
internal models in QIS5 totalled more
than 1300bn. Taking into account the
reduction arising from diversifcation
benefts recognised at solo level
based on the correlations between the
risks (466bn) and the adjustment
recognizing the undertakings ability
to reduce discretionary benefts or to
pay less taxes after a stress (in total
314bn), this leads to the fnal SCR being
a little above 41% of the sum of all risks
modelled (547bn). The main risk drivers
were the market sub-risks (equity, spread
and interest rates) followed by the non-
life underwriting sub-risks (premium and
reserve risk and catastrophe risk).
QIS5 required the identifcation and
calculation of an amount representing
expected profts included in future
premiums (EPIFP) and its disclosure as
a separate item under unrestricted Tier
1. For this purpose future premiums are
those taken into account as part of the
cash infows used to determine technical
provisions under Solvency II. In order to
provide quantifcation as part of QIS5
a proxy methodology was developed in
liaison with industry bodies which utilises
the lapse risk methodology already
specifed for the SCR but re-calculates
this for EPIFP purposes on the basis of
a 100% lapse. Application of the proxy
required undertakings to hold all other
assumptions unchanged even if this
involved creating artifcial calculations
of a paidup amount for policies for which
no paid-up amount arises or which would
be void or cancelled if premiums were
not paid in practice. EPIFP attracted
a signifcant level of comment during
QIS5 mainly around lack of clarity and
time consuming calculations. In terms
of results, weighted average percentage
of EPIFP to Tier 1 among undertakings
(those who provided EPIFP estimates)
was 20% (close to 7% of non-life and
around 30% for life) with a median of
14%.
Technical Provisions
Under Solvency II, the valuation of
technical provisions follows the transfer
value principle, under which the value
of technical provisions shall correspond
to the current amount the insurer
would have to pay if was to transfer its
insurance obligations immediately to
another insurer. To achieve a valuation
consistent with this principle, the
technical provisions are calculated as a
best estimate plus a risk margin. The risk
margin represents the cost of providing an
amount of eligible own funds equal to the
Solvency Capital Requirement necessary
to support the insurance and reinsurance
obligations over the lifetime thereof.
Overall gross technical provisions for all
lines of business decreased by 1.4% from
Solvency I to QIS5. The main differences
between technical provisions under the
QIS5 and Solvency I methodologies can
be explained by the following:
the use of a new discounting model
including the use of an illiquidity
premium for some products;
the absence of any surrender foor;
the recognition of future premiums
and charges; and
the use of realistic assumptions in
the best estimate calculation (i.e. no
implicit prudence margin, although
this is partly offset by the inclusion of
an explicit risk margin in addition to
the best estimate). In the valuation of
QIS5 liabilities, management actions
and policyholders behaviour, such
as lapses, renewals and surrenders,
were taken into account.
For life insurance business net
technical provisions in QIS5 increased
in comparison with Solvency I. This
was mainly caused by the decrease
in reinsurance recoverables, as gross
technical provisions in fact showed a
slight decrease of 1.0%. For most non-
life lines of business net provisions
have decreased from Solvency I to QIS5;
as a whole, gross provisions for non-
life decreased by 24.9%. Equalisation
reserves can no longer be included in
the technical provisions. The reduction
between Solvency I and QIS5 for non-life
business is mainly due to the discounting
of future cash fows, and the exclusion
of the implicit safety margin included in
technical provisions through prudent and
cautious assumptions, partially offset by
the inclusion of an explicit risk margin.
Based on the amount of the illiquidity
premium risk sub-module in the SCR, the
effect of the introduction of the illiquidity
premium in the valuation of technical
provisions in QIS5 can be estimated as
being almost 1% of the value of technical
provisions (which represents around
15% of SCR). The impact is quite low as
compared to the expectations and may
raise issues about cost verses beneft.
The most common products (where
different levels of illiquidity premium was
applied):
where 50% of the illiquidity premium
was used were nonlife in general,
unit- and index-linked business,
life without proft participation, SLT
health, (health insurance which is
pursued on a similar technical basis
to that of life insurance) non-SLT
health and reinsurance (both life
and non-life).
where 75% of the illiquidity premium
was used were life insurance with
proft participation in general, pure
savings products, unit- and index-
linked insurance with guarantees,
and various types of annuities.
where 100% of the illiquidity
premium was used were different
types of annuities (including
annuities from non-life)
It is clear that illiquidity premium has
not been applied consistently by the
participating frms and there are number
of areas that need clarifcation.
A number of areas have been identifed,
by EIOPA, which might need further
development:
The Risk Margin calculation, as
provided by the full approach, seems
overly complicated, leading to a
very large use of the simplifcations
provided. Further guidance on
simplifcations will be needed
for ensuring consistency in the
calculation throughout Europe. No
major concerns have been raised
with regards to the cost of capital
factor (6%), which is surprising
considering the fact companies
having different capital structure
would expect to have different cost
of capital.
The defnition of the contract
boundaries seems to be unclear.
This leads to signifcant differences
and a potential unlevel playing feld.
Further clarifcation will have to be
provided, taking into account where
relevant and appropriate the work
undertaken by the IASB.
Given the inconsistent application
of the illiquidity premium buckets
across insurance undertakings,
detailed guidance may be issued on
what products attract the illiquidity
premium and to what extent.
The interpretation and calculation
of unavoidable market risk (median
result was less than 5% of total
risk margin for the UK frms).
There was no detailed guidance
in the technical specifcations on
how to interpret and calculate
unavoidable market risk. Almost all
non-life undertakings followed the
simplifcations stating that it is likely
that this unavoidable market risk
is nil for them. Life undertakings
calculated unavoidable market risk
when the duration of their liabilities
was longer than the maturity of
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assets on an active market and used
different approaches to calculate the
amount.
The real (i.e. net from intra-group
transactions) diversifcation benefts
are mainly observable in the market
and non-life catastrophe modules.
Strong concerns have been raised
with regard to the catastrophe
scenarios for non-life business, in
respect of the calibration, as well
as the complexity and availability of
data. None of the methods proposed
was free of concerns, and further
work is needed.
Internal models
For QIS5, undertakings that are
developing full or partial internal models
were asked to calculate the SCR both
with the standard formula and with the
internal model. Additionally participants
were asked to provide quantitative data
in order to allow the impact of the use
of internal models on solo undertakings
and groups capital requirements to be
assessed.
From the qualitative questionnaires it was
found that:
262 undertakings (out of 309 which
answered the question) were already
using internal models for some
individual aspects of their business;
289 undertakings were currently
working on the implementation of
their internal model for Solvency II
purposes.
Solo undertakings which were part of
groups for the most part declared that
they would be using internal models
developed at group level; 159 out of
166 (96%) undertakings answered that
they used the same methodology as the
one used in the internal model for the
calculation of the group SCR.
Participants reported the following main
reasons for using internal models instead
of the standard formula:
internal models better refect the
undertakings specifc risk profles,
additional risks are covered by the
internal model beyond those covered
by the standard formula;
the internal model applies a more
granular aggregation method than
the standard formula;
the standard formula does not take
into account volatility
EIOPAs view is that changing the
parameters of the standard formula
themselves should not be considered
as internal modelling and does not
comply with the Solvency II requirements
regarding internal models.
The most common method for producing
the probability distribution forecast
mentioned by undertakings was Monte
Carlo simulation. Reports of the number
of simulations used varied widely, from
10,000 to as many as 100,000 (the
median was 25,000 simulations).
In most cases undertakings reported
taking into account the following future
management actions in their internal
models:
changes in asset allocation;
changes in future bonus rates;
changes in product charges or
expense charges;
changes in their reinsurance
programme;
dynamic hedging; and
run-off decisions.
Some undertakings stated that in
extreme scenarios, management actions
may also include exceptional actions,
such as closure to new business.
Most undertakings use the same risk
measure, confdence level and time
horizon for economic capital in their
internal models as defned in the Solvency
II Directive: 99.5% VaR over one year.
Some common examples of validation
tools (programs designed to gain comfort
that the internal model is appropriate
and reliable) mentioned by undertakings
include:
back testing;
sensitivity testing;
stress and scenario testing;
proft and loss attribution;
benchmarking; and
analysis of change.
In QIS5 234 undertakings (about 10% of
all participating undertakings) provided
overall SCR results calculated by internal
models. Comparison of the internal
model SCR and the standard formula
SCR (based on the small sample) shows
that the median of the ratio of SCR using
internal model to SCR using standard
formula, was 91% and the weighted
average was 99%. For large and medium
undertakings the median of the ratio
was 93%, and for small undertakings
the median was 101%. For groups, the
median of the SCR calculated via internal
model is about 80% of the one deriving
from the standard formula.
Summary
QIS5 has shown that Solvency II will be
more onerous than the existing regime.
However, the EU insurance industry as a
whole remains suffciently well capitalised
and in a strong position. QIS5 shows that
the European insurance industry has high
quality capital, with 92% of the available
capital being classed at the highest
quality possible. The results show that, at
present, 15% of European insurers would
fail to meet the minimum requirements
and close to 5% would risk having
their licenses withdrawn. A number of
insurance groups covered by Solvency
II may streamline their UK and possibly
European group structures, which under
the QIS5 standard formula measurement
have attracted an additional capital
charge.
Solvency II presents an opportunity
for companies to reduce capital and,
optimise available capital and align their
group structures and this may lead to an
increase in M&A activity. In the short term
the compliance cost may increase due to
the signifcant work required to achieve
Solvency II standards. Insurers may review
their investment and debt-fnancing
strategies as certain asset classes and
debt instruments will carry higher capital
charges or be classifed differently under
the directive. Additionally, higher capital
charges will mean certain products
become unproftable, leading insurers to
stop writing certain classes of business or
re-designing some products. The results
may also impact some frms decision to
seek approval for the use of an internal
model.
QIS5 was planned to be the last
opportunity before the implementation
of Solvency II, in January 2013, to
undertake such a fully comprehensive
exercise. QIS5 results will have signifcant
impact on the delegated acts, technical
standards and level 3 guidance, required
for implementing Solvency II. However,
since then, the European Commission
and the European Parliament have both
indicated that full implementation of
Solvency II will be delayed until 1 January
2014. The implications of this are
unknown at the present time. Whatever,
happens, the run up to Solvency II
implementation will remain challenging
due to other regulatory changes being
planned around the same timeframe
Retail Distribution Review in the UK, EU
directive to ban use of gender in pricing
of insurance contracts and IFRS Phase 2.
About the author:
Gautam Kakar is a Principal Consultant
and qualifed actuary working for the
Actuarial & Insurance Management
Solutions (AIMS) practice of PwC in
London. Gautam specialises in business
management, strategy development
and execution, governance, product
development and fnancial modelling
having worked as Business Leader and
experienced in life, non-life, benefts and
wider fnancial modelling.
gautam.kakar@uk.pwc.com
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q&A SESSION: PETER DOYLE
PRESIDENT ACTUARIAL SOCIETY OF SOUTH AFRICA
The following interview was published in-house by
Actuarial Society of South Africa in August 2011.
Peter, for starters, can you provide some
background on your journey through the
corporate world in South Africa?
vI got a bursary from Homes Trust Life,
and completed my B.Bus.Sc. in Actuarial
Science at UCT. I then went to work in
London for a year. Back in South Africa
I joined Homes Trust Life (which later
became Metropolitan Life), qualifying as
an actuary in 1983. The frst 3 to 4 years
were straight valuations work, which I still
believe to be foundational. I then spent a
couple of years as a pricing actuary and
marketing actuary, followed by working
in corporate marketing and strategic
planning. From there I became GM of
Finance at Metropolitan, and started with
AIDS modelling on the side. That became
like a parallel career after 1987 when I
went over to the US to attend a seminar
on the HIV epidemic, which developed my
interest in the AIDS modelling work. I went
back to Montreal in 1992 to present the
AIDS model at the International Actuarial
Congress. At Metropolitan I got involved
with setting up Metropolitan Employee
Benefts, and Metropolitan Health. I went
on to become CEO of Metropolitan in
1998, being 42 years old at the time, and
held that post for 10 years.
were you involved in ASSA matters prior
to becoming the president-elect?
v I have had three major roles with
ASSA prior to becoming president-elect.
I was on the AIDS Committee for 10
years and convenor of the committee
for much of that time. I was also on the
Life Assurance Committee for about 8
years during the Financial Soundness
Valuation development and the early
days of EV. Then in the mid-90s I was on
Council for 4 years.
what motivated you to take on the
position of the president of ASSA?
vI became president-elect in my last
year at Metropolitan. I already had the
awareness it would be quite diffcult
to take on the presidency role and be
chief executive of a fnancial services
company. The motivation stems from
taking on the establishment of FASSA
and adopting that framework in South
Africa. I have never lost my actuarial
roots; Im probably frst and foremost
an actuary. The other motivating factor
was the move for ASSA to become an
independent actuarial professional body.
Over the last 10 years the International
Actuarial Association (IAA) has developed
into a dramatically different organization,
and so ASSA is now a full international
participant in actuarial matters.
Is the role of president-elect that
different from being the president?
v Should I tell Themba? I dont want
to scare him off just yet. I guess its the
difference between deputy CEO and
CEO it actually does stop at your desk.
Its a lot of work, actuarially speaking
its about 3 days a week but it does
fuctuate. Its more than a part time job,
its a commitment. We have been doing a
lot of work looking at the business model
of the Actuarial Society. Were at that
classical stage of going from a very small
business to a medium sized business -
you have all these growing pains and
resource issues. We have been putting
a lot in place this year to try and make
the governance process more effective
and effcient. Theres much more clarity
of roles, responsibilities and delegative
authority that you wouldnt necessarily
need in a small organization, but
becomes critical in a medium-sized body.
what is the biggest challenge facing
the actuarial profession in South
Africa?
vThis is a classic question for which
I should have a slick answer. There are
two things; frst, due to the fnancial
crisis there will be a dramatic increase
in regulation. Funny enough the risk is
that actuaries move into an increasingly
complex mindset that our response to
this tremendous pressure of legislation
is to reciprocate with over-complexity.
The opportunity is that if we understand
the policy intentions of regulators, then
we can work with them and not against
them. We have a tremendous opportunity
in South Africa in that National Treasury
have published their policy framework
(the so- called Twin Peaks policy
framework), and its by far the most
clear, single policy document that I
have ever seen. You might agree with it
or not, but its a brilliantly clear policy
document and that helps tremendously
while you are developing things so you
can see where you are going. The second
risk, and opportunity, is the question of
systemic risk. The opportunity is that
actuaries are uniquely placed to talk
about systemic risk. South Africa is also
uniquely placed in that it is a gateway
to Africa. Over the last 5 years you have
seen a complete watershed change of
power from the developed world to the
developing world. South Africa is now
offcially part of the BRICS countries, but
only because we are a proxy for Africa.
We are uniquely placed in that we have
frst world links (our fnancial system is a
frst world based framework), situated in
a third world market. We therefore have a
lot to offer, on both sides of the equation.
Banking environment?
v Yes. Banking needs complex
modelling skills and we have them. Garth
and I have been quite involved with the
global CERA development, and talking to
our colleagues overseas they say there
are big opportunities for actuaries to be
modellers and risk offcers in banking.
But in South Africa, thats what actuaries
already are doing! We have some very
signifcant actuaries in signifcant banks.
Probably more so than any other country
I know, apart from possibly Australia
which is in a similar situation.
DoyouthinktheAssociatequalifcation
will help to make the transition into the
bankingenvironmentandwiderfelds?
v Yes, that is the intended purpose.
We have now become a fully fedged
participant of the IAA, and internationally
a fully qualifed actuary is an Associate
actuary. I think the best analogy to
illustrate the concept is the medical
profession. So an Associate is a doctor,
and a Fellow is a specialist. So consider
that specialists tend to stay in their
feld of specialty, while doctors go
wider. Associates can go into banking,
healthcare, or even into the energy feld.
Obviously the biggest application of the
associateship will be in investments. For
PETER DOYLE
President
Actuarial Society of South Africa
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example a fantastic qualifcation would
be an Associate actuary plus a CFA, so
you could understand the asset and
liability side.
More generally, should the actuarial
community be taking on leadership
rolesinthefnancialservicesindustry?
what skills do we offer besides our
technical abilities?
vThe obvious answer should be yes,
but its yes with two caveats. Firstly,
if we consider the numbers, South
Africa has roughly 25,000 chartered
accountants. The IAA represents in
the order of 40,000 actuaries globally.
Realistically, we are talking about a
signifcantly smaller profession than
most. The second point is that if you
are getting into management or other
felds, particularly at a leadership level,
your actuarial mindset never leaves you
but you have to develop other skills.
You wont become the CEO of a bank
because you are an actuary, it will be
because you have others skill which your
actuarial skills might complement. The
two skills that one needs are business
context and communication. Two-way
communication skills to be more precise,
actuaries are not always good at the two-
way part. An actuarial qualifcation is a
passport to certain key jobs, but not all.
what is your take on actuaries
providing value in the public versus the
private sector?
v I really think actuaries can play a
very signifcant role in the public sector.
We did some work on Council this year to
identify the uniqueness of the actuarial
profession, and the core skill is dealing
with complex fnancial systems with
uncertain outcomes. Interestingly, the
other key skill is that we blend fnancial
parameters with human parameters. Its
the intersection between fnance and
people. Mortality, disability, lapse rates
thats all modelling human behaviour. On
the fnancial side were modelling assets
and liabilities. Its the only profession
which does both. As actuaries we have a
unique opportunity to participate in the
public space and discourse.
Currently, actuaries probably have
more infuence in technical roles
rather than in leadership positions
on a national level should we not
be putting more input into matters of
nationalsignifcance?
v The Actuarial Society should be
doing that, and thats been the single
biggest topic of conversation on Council
this year. ASSA should be playing a
facilitation/consultation role as subject
experts, not a lobbying role which
has a particular connotation as being
the opposition. There has to be some
political sensibility that you tie into that.
It should be a bigger role than we are
currently playing.
Do you think South Africa should have
a Government Actuarys Department
much like the UK?
v Its one of the directions. What it
involves is putting a couple of skilled
people in positions of infuence within
government. One of the problems is that
we talk of the private and public sector
as if they are opposites, but when we talk
about national policy we have the same
interests e.g. to grow the economy, to
create jobs etc. An actuary is somebody
with skills that are widely transportable. If
the government would like a Government
Actuarys Department, then we would
support it.
Is the actuarial profession insulated
from global movements like the
emergence of China and India as
fnancial powers will this have
impacts on actuaries in South Africa?
vThats an interesting question. I cant
talk much about China, but they have just
joined the IAA and our frst interaction
with them was at the last IAA meeting in
Sydney in April. One thing I can say is that
they did a wonderful audio presentation
on the actuarial profession in China,
in which they carefully explained to
everybody that actuarial science was
actually invented in China 5,000 years
ago. As for India, their convention is
called the Global Congress of Actuaries.
I presented at their Congress this year
and in his opening address the Institute
of Actuaries of India (IAI) president,
Mr. Liyaquat Khan, elaborated that
its referred to as a Global congress
because the Indian nation is a nation of
diaspora. So there are Indian actuaries
all around the world, not just in India.
The vision of the IAI is to have 20,000
Fellow actuaries in due course, and
these will be actuaries working anywhere
in the world or actuaries working in India
for companies anywhere in the world.
Already a fairly signifcant number of
Indian actuaries are working on Solvency
II for European companies.
I collected some numbers while I was
there, as actuaries do, and there are
about 250 qualifed actuaries in India
and 6,000-12,000 students. Mentoring
such large numbers of students will be
the challenge for them. Similarly in China,
there are a couple of hundred actuaries
and 8,000 students.
what is your vision for the actuarial
profession in South Africa?
v Our vision is that actuaries are
known by our key stakeholders as people
that can add value to complex fnancial
problems. That sounds quite simple, but
theres a lot that goes with it. It covers
education, it covers our branding, and it
covers our relationship with clients and
key stakeholders. I dont think there is
any value in us communicating to the
whole population what actuaries will
do, we must communicate with our key
stakeholders. There are only so many
people we can service and interact
with, and they themselves are key
people. As long as we know who our key
stakeholders are, and they know what we
can do, then the job is largely done.
what advice would you offer actuaries
that are interested in getting involved
in ASSA matters?
vGet involved. One of the diffculties
at the moment is that we probably have
more people wanting to get onto technical
committees that we can accommodate,
and fewer people in the other support
areas than we need. Some of the other
areas are just as interesting as the
technical committees. There are only so
many people you can have on LAC, but
getting involved in Stakeholder Board
(we are busy there with brand building
and chatting to stakeholders and the
FSB) can develop your wider skill sets as
we discussed earlier. It puzzles me that
people steer clear of those wider feld
activities in ASSA. I often get asked what
the secret to becoming a CEO is, and I
respond that I have no idea! The only
principle that seemed to have worked for
me is that I always did more than what
is expected, just because I was always
interested in doing more and looked to
push the boundaries of my role.
Are you offcially retired? Finally, what
isnextforPeterDoyle?
v What does retirement even mean?
Thats a whole discussion on its own.
Consider the whole worldwide trend
of older retiring ages, in Europe they
are talking about age 67 and in New
Zealand they have offcially abolished the
retirement age. Technically, Im a retired
member of the Metropolitan Pension
Fund, but thats the only requirement for
retirement that Ive fulflled. I still work,
Im still involved, Im not 60 and I expect
to be involved for much longer than
60. So in short, I dont qualify as being
retired. I will still be involved in ASSA,
mostly in my leadership role of the IAAs
Professionalism Committee. I also have
several other board positions. Im a strong
believer that when the new president of
ASSA comes on board, that the previous
president makes way Themba Im sure
will do a great job. Personally, Im looking
forward to my free time again ... maybe
have another sabbatical, and some
reading, research and consulting work. I
have found reading and research to have
been a motivating factor throughout my
career.

he Insurance Regulatory and
Development Authority (IRDA)
recently introduced an exposure draft
altering the norms for an appointed
actuary. The insurers have welcomed
the move hoping that it will be helpful
for general insurance industry in flling
up the gap of qualifed actuaries.
According to the exposure draft, the
appointed actuary shall be a full-
time employee of a general insurance
company. At present, majority of
the general insurance companies
have consultant actuaries currently
and only around 5 to 6 companies
have full-time appointed actuary.
The draft mandates that the person
eligible as an appointed actuary of
an insurer shall not exceed the age of
70 as on October 2012. The person
should not be over the age of 65 which
will be effective from October 2013.
He should have served the industry
for more than 10 years and the
DNA; September 30, 2011
Aswathy Varughese & Yogini Jogleka:
same company for at least 2 years.
Five years of experience is also
required after becoming the fellow.
The regulator had invited comments
from insurance companies on the same.
Says, Satyan Jambunathan, senior
vice president & head- fnance, ICICI
prudential life I am positive about
the norms that regulator have come
up with. Non-life industry is facing a
challenge in the availability of qualifed
professionals. The recent regulation
will be the solution as it demands
the service of full-time actuaries
for the general insurance industry
Actuaries mathematically evaluate the
probability of events and quantify the
contingent outcomes to reduce losses.
General insurance business is
growing at a healthy pace in India. The
industry demands more qualifed and
experienced professionals who do the
pricing and risk management for the
industry. Life insurance industry already
T
has a bigger actuarial team compared
to the general insurance industry.
Qualifed set of actuaries are the need
of hour for better pricing and deal with
the administration risks of the insurance
industry. The impact will be more on
general insurance company, says
Monish Shah, Director Delloite India.
Relaxation of eligibility criteria for
affliate members may favour more
of foreign actuaries. Experience
requirement need to be altered
for favouring more qualifed Indian
professionals, says GN Agarwal, chief
actuary, Future Generali Life Insurance.
The regulation welcomes more
experienced and qualifed professionals.
We hope that many people of Indian
origin currently working abroad will
come and bridge the gap here. The
norms are favouring young professionals
in the industry, says Amarnath
Ananthanarayanan, CEO & managing
director, Bharti Axa General Insurance.
IAA news release: September 27, 2011
Iaa aND ISSa SIgN MEMORaNDuM OF
uNDERSTaNDINg IN gENEva
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he International Actuarial Association
(IAA) and the International Social
Security Association (ISSA), the frst
Institutional Member of the IAA,
executed a formal Memorandum of
Understanding (MoU) in Geneva on
September 23. Founded in 1927,
ISSA is a non-proft international
organization, which brings together
institutions and administrative bodies
involved in administering social
security from countries all over the
world. As the independent voice of
social security, ISSA assists members
and policymakers to face challenges
and develop social security systems
through platforms of cooperation and
research, knowledge production and
transfer and the promotion of social
security at the international level.
The purpose of this MoU is to set out
the terms of an agreement between
IAA and ISSA that creates the
framework for cooperation between
the parties to beneft from common
areas of activity in their respective
strategies and operations. Key
elements of the joint programme of
cooperation include:
NEw NORMS ON aCTuaRIES BODE wEll FOR
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Organization of joint ISSA/IAA events
Exchange of information and
publications
Participation in events organized by
one of the parties
Organization and publication of joint
studies
Representation in the relevant
committees and working groups of
each party
This MoU represents a continuation
of outreach activities arising from the
key objectives of the IAA Strategic Plan
that include establishing, maintaining
and extending cooperative relationships
with major supranational organizations,
with a particular emphasis on those
areas where actuarial input is a
signifcant factor infuencing decisions
on important social and economic issues
with a global impact. This memorandum
of understanding formalizes the mutual
cooperation between the IAA and ISSA
in a way that transcends the tenure
of particular individuals involved in
the relationship from time to time,
and will ensure a continuation of the
relationship independent of the tenure
of key individuals.
To learn more about the work of
the IAA in this area, contact the IAA
Secretariat, care of the Chairperson
of the Supranational Relations
Subcommittee
IAA news release: September 27, 2011
Iaa PaRTICIPaTES IN JOINT DISCuSSION FORuM wITH
IlO, ISSa aND wHO IN gENEva
a
six-person IAA delegation
participated in a joint discussion
forum on social security and health care
fnancing topics with the International
Labour Organization (ILO), International
Social Security Association (ISSA) and
the World Health Organization (WHO) on
September 22 at ILO headquarters in
Geneva. A total of fourteen participants
from the four organizations engaged in
a full day of discussions that included
the following topics:
extension of social security
coverage
the concept of a social protection
foor
assessment of coverage gaps
peer review and actuarial
assessments of country
programmes
education and training programmes
for social security actuaries
actuarial capacity-building in
developing countries
sustainability and fnancial stability
of social security programmes
guidelines and standards for social
security, including unemployment
insurance administration,
fnancing of health care delivery
systems
country-specifc models for national
health insurance and other forms of
health care fnancing
population issues and impacts of
ageing and migration on social
security and health care
importance of fertility and long-
term economic factors in fnancial
projection methodology
social security systems high-
priority needs and requests for
international standards of actuarial
practice
the role of regional development
banks in Latin America, Asia and
Africa.
This joint discussion forum is the
second annual forum to be held at ILO
headquarters in Geneva and represents
a continuation of IAAs strategic outreach
activities to establish, maintain and
extend cooperative relationships with
supranational organizations. The forum
provided an opportunity to identify
several areas for future collaboration
with and between the participating
organizations.
To learn more about the work of the IAA
in this area, contact the IAA Secretariat,
care of the Chairperson of the
Supranational Relations Subcommittee
IAIS Press Release; 1 October 2011
IaIS FOCuSES ON FINaNCIal STaBIlITy IN
ITS 2010/11 aNNual REPORT
T
he role that the IAIS plays in
promoting fnancial stability is an
important one, and one that is constantly
evolving in response to developments
in the economy and fnancial markets,
writes the International Association of
Insurance Supervisors (IAIS) in its latest
Annual Report. The IAIS approved its
2010/11 Annual Report for release at
its Annual General Meeting (AGM) in
Seoul, Korea on 1 October 2011.
Peter Braumller, Chair of the IAIS
Executive Committee, says: Last year
was a year of growth and development
for the Association mainly due to
increased external demands and
expectations arising from fnancial
stability issues, which the Association
met with internal and structural changes
designed to improve our resilience
and responsiveness in light of current
challenges...
The report outlines the Associations
work related to fnancial stability,
including the development of a
methodology to identify potentially
systemically important insurers (G-SII),
possible supervisory measures to
address any systemic concerns, and
appropriate resolution mechanisms
in the insurance context. It further
describes progress made on the
development of the Common
Framework of the Supervision of
Internationally Active Insurance Groups
ComFrame. The report also points
to initiatives launched to strengthen the
effectiveness of insurance supervision
and to foster convergence.
Yoshihiro Kawai, the IAIS Secretary
General, said during the AGM: The
Association is always mindful that
standards without solid supervisory
practice and implementation have
limited impact in the real world.
The 2010-2011 Annual Report is available on
the IAIS website at http://www.iaisweb.org/
Annual- reports-44.
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Secretariat: 601150 Metcalfe, Ottawa, ON Canada K2P 1P1 Tel.: +1-613-236-0886 Fax: +1-613-236-1386
secretariat@actuaries.org / secretariat@actuaires.org www.actuaries.org / www.actuaires.org
ASSOCI ATI ON ACTUARI ELLE I NTERNATI ONALE
I NTERNATI ONAL ACTUARI AL ASSOCI ATI ON
Ottawa
October6,2011
PRESSRELEASE
PrivateSectorTaskForcecallsonG20topromoteRegulatoryConvergence
The Private Sector Task Force of Regulated Professions and Industries (PSTF) has released its final report to
G20Deputies.ThePSTFwasestablishedinMay2011attherequestofthePresidencyoftheG20toprovide
ananalysisofgapsinregulatoryconvergenceandtomakerecommendationsonhowtoclosesuchgapsacross
anumberofprofessionsandindustriesthatoperatewithinthefinancialsector.
In addition to the International Actuarial Association (IAA), the membership of the Task Force includes:
International FederationofAccountants(IFAC,thatalsoprovidedlogistical andadministrativesupportforthe
Task Force), CFA Institute (CFAI); INSOL International; Institute of International Finance (IIF); International
Accounting Standards Board (IASB); International Corporate Governance Network (ICGN); International
InsuranceSociety(IIS);andInternationalValuationStandardsCouncil(IVSC).
IAA President Cecil Bykerk stated "We hope that the G20 Deputies will find this report clear in setting out
practicalstepsthattheG20shouldtaketopromoteregulatoryconvergenceinthefinancialsector."
PSTFReportrecommendationscallfortheG20tomaintainitsmomentumandambitionforglobalregulatory
reform and convergence and to discourage unilateral national regulatory reforms that are inconsistent with
international standards. The PSTF recommends the G20 to encourage and support the development,
adoption, implementation and consistent interpretation of globally accepted highquality international
standards, to the greatest extent possible, for each of financial reporting, auditing, valuation, and actuarial
services. Additionally, the report stresses the necessity of open communication and transparent processes as
well as continued cooperation and enhanced consultation between regulators and professional and industry
groupsindevelopingandimplementingeffectiveregulatoryreforms.
IAA Past President Paul Thornton said "The IAA particularly supports the recommendations to encourage
convergence of financial reporting, auditing, valuation and actuarial standards, and the encouragement for
implementation of the IAIS Insurance Core Principles and Common Framework for the Supervision of
InternationallyActiveInsuranceGroups."
TheInternationalActuarialAssociation(IAA)istheworldwideassociationofprofessionalactuarialassociations,
with a number of special interest sections for individual actuaries. The IAA exists to encourage the
developmentofaglobalprofession,acknowledgedastechnicallycompetentandprofessionallyreliable,which
willensurethatthepublicinterestisserved.
Contacts: Mrs.NicoleSguin
IAAExecutiveDirector
16132360886ext123
Email:executive.director@actuaries.org
Website:www.actuaries.org
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FROM THE DESK OF
CHAIRPERSON -
ADvISORY GROUP ON PENSION,
OTHER EMPLOYEE BENEFITS &
SOCIAL SECURITY (PEBSS)
K SUBRAHMANYAM
ksmanyam@vsnl.com
T
his group appears to be well known
more with consulting actuaries
than with the students and associates.
Members of the profession should, I feel,
know about the Advisory Group created
by the Institute for and to the beneft of
members and also what it does.
Functions of this group can be viewed
from the Institutes website at www.
actuariesindia.org/peb-ss.html.
In brief, the group is defned to take
care of interests of those actuaries who
are consulting actuaries associated
with pension, employee benefts and
social security scheme. The group is
responsible for suggesting the Syllabus
of SA4 to the Institute. It also conducts
seminars every year on the current
issues in retirement benefts (CIRB,
popularly known). It also drafts Guidance
Notes (these are fnally approved by
the Council after consultation with the
members of the profession) to help the
actuaries to perform their functions in
the best interests of customers. Major
activity of consulting actuaries is to
certify the accrued liabilities of defned
benefts specifed in the Accounting
Standard 15-Revised 2005 (AS15-R)
issued by the Institute of Chartered
Accountants of India -----This is highly
remunerative job. All employers who
provide defned benefts are required
to get the certifcates from actuaries in
accordance with AS15-R. Since these
actuaries advise the public, guidance
notes play important role and guidance
notes really guide the consulting
actuaries.
Every year CIRB is conducted for the
beneft of consulting actuaries. In
October, 2010, this group conducted
a seminar on CIRB; next one is due in
Nov, 2011. Focus of that seminar was
to help the employer to design better
beneft packages to their employees and
the actuarys role in that. Still details
of the seminar with presentations are
available in the Institutes website. It is
similar to an insurers product. Various
employee benefts include pension [a
voluntary scheme adopted by employer
to retain staff], gratuity [a mandatory
beneft as per Payment of Gratuity Act,
1972], leave encashment [a voluntary
scheme of employers to beneft the
employee], and compensated medical
absences. In the regular work of a
consulting actuary, he/she is required
to know (1) companys schemes which
provide defned benefts; (2) statutory
benefts such as gratuity and provident
fund; (3) income tax laws governing the
schemes; (4) Accounting Standards;
and (5) Guidance Notes of IAI.
International Actuarial Association
has a wing Pension, Benefts and Social
Security (PBSS). Details are available on
their website. Internationally, actuarial
assumptions are discussed---how,
why, and what---rate of discount can
be used; salary escalation, mortality/
morbidity rates, accounting practices
while reporting. This body produces
educational notes on many areas---
pension and social security, particularly
when actuaries advise government
bodies. In this association, IAI is a
member participating in its various
seminars/conferences.
Opportunities: are plenty. Some of our
actuaries advice insurance regulators
(in India and outside India), and clients
on wider felds such as M & A, stock
options, warranties, and EVs. Though
the groups activity is confned to the
above, actuaries gain lot of knowledge
using the experience acquired in these
areas. There are consultancy frms run
by actuaries who employ students,
associates and fellows to do various
consultancy jobs. Some well known
names in this feld are KA Pandit
Consultants and Actuaries, Thanawala
Consultancy Services, Charan Gupta
Consultants Pvt. Ltd., E&Y, Tower
Watson, etc. Sole-proprietorship frms
also exist in India, where actuaries are
engaged in consultancy alone. [Author is
a consulting actuary doing consultancy
alone, for instance].

vision: IAI to be a globally well recognized professional organization developing enduring thought leadership in managing
uncertainty of future fnancial outcomes.
Mission: 1. To educate/train risk professionals 2. To enhance and maintain high professional standards 3. To shape Public
Policy and Awareness 4. To engage with other professional/regulatory/government bodies 5. To promote/build IAI as a
respected brand of risk management globally 6. To promote research to advance actuarial science/application.
values : 1. Integrity 2. Respect for others views 3. Accountability 4. Continuing Learning/Research Oriented 5. Transparency
6. Be Responsive/Sensitive.
DRAFT vISION, MISSION AND vALUES STATEMENTS OF IAI
THE FuNDaMENTalS OF PENSION MaTHEMaTICS
By BaRNET N BERIN
Reviewed by Suresh Sindhi
suresh.sindhi@mercer.com
was about to start my journey by car
from Mumbai to Pune on Saturday
morning when I received a book titled The
Fundamentals of Pension Mathematics
for review. I decided to review it during my
journey which I thought would take three
hours to complete.
This edition of the aforementioned book
is the latest revision of a work frst printed
in 1971 under the sponsorship of the
Committee on Continuing education of the
Actuaries Club of New York and published
in 1989 under the sponsorship of Society
of Actuaries by Barnet N. Berin, FSA.
The book is split into thirteen chapters.
Introductory chapters cover the defnition
of Funding Methods, reason, selection and
description of Standard Funding Methods
such as Unit Credit, Individual Entry Age-
Normal, Entry Age Normal-Frozen Initial
Liability, Attained Age Normal-Frozen Initial
Liability and Aggregate Cost methods.
I
Book Number : B11127
Status : Available at IAI Library
These chapters also cover the roles of
assets and development of assets at book
value and market value alongwith the
analysis of Asset Gain and Loss.
Subsequent chapters cover the signifcance
of Actuarial Gain and Loss. Actuarial Gain
and Loss has been further split into 1.
Gain and Loss arising because of deviation
between Actual experience versus Expected
experience. 2. Gain and Loss arising
because of changes in assumptions.
There is a short chapter on ancillary
benefts such as disability benefts, life
annuity benefts to a surviving spouse
and benefts for multiple retirement ages
instead of single retirement age.
One chapter is devoted to treatment of
contributions payable into the pension fund
by plan sponsors and the employees from
tax deduction perspective in US, UK and
Canada.
This book has also covered optional
benefts such as 1. Reduced level of
benefts at early retirement date in place
of a larger, accrued beneft payable at
normal retirement date. 2. Reduced beneft
payable at normal retirement date to a
retired participant with some percentage of
this beneft payable to a surviving spouse.
There is a chapter dedicated to the role
of the Actuary in handling Multiemployer
Pension Plans alongwith challenges faced
by the Actuary in handling such types of
plans.
The last chapter covers the pension
accounting as per US Financial Accounting
Standards 87 which chooses the Projected
Unit Credit funding method as the sole
approach to developing Accrued Liabilities
and Current Service Cost in determining
pension expense and balance sheet
liabilities.
All the chapters are followed by problems
and their solutions. Most of the formulae
derived in this textbook have used
Commutation functions.
I reached Pune safely and completed
reviewing the book at the same time.
In summary, this book is good for beginners
who want to understand the basic actuarial
mathematics used in pension area and
who want to learn about standard funding
methods, analysis of Actuarial Gain and
Loss and the accounting treatment of
pension liabilities.

few years ago, frst time when I
heard about microinsurance, the frst
question that crossed my mind was
whether the poor really wanted any kind
of insurance. More important priorities for
them may be food, clothing, and shelter.
You may fnd many educated, urban, rich
people who are not convinced of the value
of insurance, how this idea of insurance for
the poor may work?
In fact, the annual report 2010 of the
Microinsurance Innovation Facility does
identify fundamental questions regarding
viability and client value: 1. Do low-income
households beneft from insurance (ie client
value)? 2. Is the provision of insurance to
the poor viable (ie viability)?
The report is very well organized. It covers
the vision, strategy, activities, achievements
and challenges of the Facility concisely
in 60 odd pages. Details on partners,
projects, studies, etc have been organized
in annexures for easy reference.
The Facility was launched by the
International Labour Organization (ILO)
PROTECTINg THE wORkINg POOR
aNNual REPORT 2010 PuBlISHED By IlO
Reviewed by Kamlesh Gupta,
kgupta@rgare.com
with funding from the Bill & Melinda
Gates Foundation. It has developed a
knowledge management framework and
its activities within the framework have
two main threads: knowledge capture and
knowledge sharing. The annual report has
also been structured accordingly.
Knowledge Generation & Capture
The objective of knowledge generation
is achieved thorough innovation grants,
research grants, commissioning
of longitudinal studies and project
assessments. Some of the topics on which
studies have been done seem to be very
interesting e.g. gender and microinsurance,
microinsurance in Africa.
The Facility has its own knowledge
management portal which is used by
its partners and grantees. The portals
Learning Diary tool is used to capture the
lessons that a project generates while
working towards its milestones. The report
makes it easy to understand such tools by
providing a brief introduction and also a
sample.
The Facility has started putting greater
emphasis on health microinsurance. Also,
there is greater importance attached
to the use of technology because it can
help organizations reach large number of
households.
KNOwLEDGE SYNTHESIS & SHARING
This section covers an outline of the
Facilitys knowledge sharing strategy
and then describes its main knowledge
sharing activities synthesizing and
packaging knowledge, disseminating
knowledge and building capacity.
The main products of knowledge synthesis
activities are publication, bite-sized
lessons & videos. Key tools for knowledge
sharing are publications and videos,
media coverage, website, conferences &
workshops and social-media platforms like
LinkedIn. As regards capacity building, the
Facility has decided to focus on its core
competencies, namely, advisory services,
professional development & training.
Overall, the report is an interesting read
and also inspirational in some ways. It
is recommended for people who want a
quick introduction to the quiet revolution
taking place in the microinsurance sector.
It is also recommended for people who
are interested in knowing how innovation
can create ways where there were none.
a
Book Number : B11231
Status : Available at IAI Library
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11. Once again you state that there will be
no remainder, and this also proves correct
(56,342 divided by 11 is 5,122).
With your back still turned, and no
knowledge whatever of the fgures obtained
by there computations, you direct a fourth
spectator, D, to divide the last result by 13.
Again the division comes out even (5,122
divided by 13 is 394). This fnal result
written on a slip of paper which is folded
and handed to you. Without opening it you
pass it on to spectator A.
Open this, you tell him, and you will fnd
your original three-digit number.
This trick cannot fail to work regardless
of the digits chosen by the frst spectator,
why?
Solutions
Puzzle No 157:
One rectangle with sides 6 units and 3 units
and the other one with side 4 units(square)
each
Puzzle No 158:
The time during which the planes speed
is boosted is shorter than the time during
which it is retarded, so the over-all effect
is one of retardation. The total travel time
in a wind of constant speed and direction,
regardless of the speed or direction, is
always greater than if there were no wind.
Correct solutions were received from:
Puzzle No 157:
1. Suresh Sindhi 2. T. Subramanya Sastry
3. Prasham Rambhia 4. R. Krishnaswamy
5. V. Parasurambabu 6. Gaurav Dugar
Shilpa's
Puzzles
Puzzle No 161:
Thirteen boys and girls wait to take their
seats in the same row in a movie theater.
The row is thirteen seats long. They decide
that after the frst person sits down, the
next person has to sit next to the frst.
The third sits next to one of the frst two
and so on until all thirteen are seated. In
other words, no person can take a seat
that separates him from at least one other
person. How many different ways can this
be accomplished, assuming that the frst
person can choose any of the thirteen
seats?
Puzzle No 162:
An unusual parlor trick is performed as
follows.
Ask spectator A to jot down any three-digit
number, and then to repeat the digits in
the same order to make a six-digit number
(e.g., 394,394). With your back turned so
that you cannot see the number, ask A to
pass the sheet of paper to spectator B, who
is requested to divide the number by 7.
Dont worry about the remainder, you
tell him, because there wont be any. B
is surprised to discover that you are right
(e.g., 394,394 divided by 7 is 56,342).
Without telling you the result, he passes it
on to spectator C, who is told to divide it by
7. Nikhil Sheth 8. Swaminathan V
9. K. M. Shanthi 10. Praveen Tiwari
11. Gurpreet Singh 12. Jagannathan P. S.
13. Sudhanshu Kalsotra 14. Sagar Bajal
15. R. Mythili 16. Mahesh Chand 17. Vikas
Rathi 18. Divakar Kumar 19. Abhay Kumar
20. Mehul Khatri 21. Mitsu Shah 22.
Shreya Gala
Puzzle No 158:
1. Prasham Rambhia 2. R. Krishnaswamy
3. V. Parasurambabu 4. Praveen
Tiwari 5. Gurpreet Singh 6. Sonal
Khirwal 7. Jagannatham P.S. 8. Ashwin
Shrivastava 9. Sagar Bajaj 10. Vikas Rathi
11. Mitsu Shah
shilpa_vm@hotmail.com

Kindly submit the answers
to the puzzle by 5th of every
month at :
shilpa_vm@hotmail.com
S
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P
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Krishnaswamy, R Ramakrishnan, R
Govindan, V Shinkar, N. K
Joshi, J.R. Sodhi, M.L.
Lakshmanan, N Cuddalore Samarao Laxmanrao
Mehta, S.R Thakore, C.R
Narasimhan, K.P Pandit, D.K
Many Happy Returns of the day
the Actuary India wishes many more years of healthy life to the
following fellow members whose Birthday fall in October 2011
To lead people, walk beside
them As for the best
leaders, the people do not
notice their existence.
The next best, the people
honor and praise. The next,
the people fear; and the next,
the people hate When the
best leaders work is done
the people say,
We did it ourselves !
- Lao-Tsu
Quotable Quotes
(Birthday greetings to fellow members who have attained 60 years of age)
RNI NO. - MAHENG/2009/28427
Published between 12
th
- 16
th
of every month
Postal Registration No. - MH/MR/South/297/2009-11
Posted between 17
th
- 23
rd
of every month

Actuary India Oct 2011

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