CIA (e)Bulletin/(e)Bulletin de l'ICA
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December 2013
 
 

New Book Offers Valuable Advice on Discount Rate Practices

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By David Congram, FCIA

Thinking of a special book to put on your wish list for the holidays? Discount Rates in Financial Reporting – A Practical Guide may be just the right choice. Its release was communicated to you in the CIA’s weekly announcements on October 30.

Published by the International Actuarial Association (IAA), with the CIA as an enthusiastic supporter and funding provider, this educational monograph addresses the concepts and practical methods that are being used in the application of the discounting process for the purpose of financial reporting for (1) insurance companies, and (2) pension and employee benefits obligations. It provides numerous case studies based on real-life examples as performed globally by actuaries, insurance companies, and pension plan sponsors.

A Practical Guide is the final result of the IAA’s three-year Discount Rate Project. Its primary audiences are those actuaries involved in financial reporting for insurers, those involved in reporting pension information for financial statements, and actuarial students seeking a greater understanding of the topic.

For the busy reader, in the front of the book is a road map, which identifies those sections that may be of special interest to a particular individual. It looks at the monograph from different perspectives. Practice area is a natural categorization (including life, non-life, and pensions and employee benefits), but it also provides guidance if you are coming from a specific accounting framework, region, or risk. It identifies which case studies will probably be of interest. It also allows you to use your time effectively by first focusing on your areas of particular interest and then, when you have time, showing you how other practice areas or regions are addressing a similar problem.

The book first places the selection of the discount rate into context. This is in terms of the purpose and objectives and when discounting is required. After that, it covers a number of topics, including:

  • Risk-free rates;
  • Decomposition of discount rates;
  • Estimating beyond the term period;
  • Replicating portfolios;
  • Incorporating currency and sovereign risks;
  • Credit and liquidity risks; and
  • Addressing when product cash flows are correlated to the discount rate.

There is also a section on communication and presentation of results, with a concluding section summarizing recent developments. There are extensive references to relevant technical papers for those who wish to dig deeper on a particular aspect.

Nearly two-thirds of A Practical Guide’s 300-odd pages are devoted to 13 in-depth case studies. To provide you with some idea of the studies included, the first is on estimation and extrapolation of the term structure of interest rates. It is an example of the understanding, selection, and use of available data necessary to establish a discount rate in an environment in which an observable market does not exist.

The last study addresses sovereign risk. It provides an example of how to assess it and understand how it may be modelled for including in the discount rate. This issue has created a number of challenges over the last few years, given the current world economic structure and trading groups.

Information about how to order your copy of Discount Rates in Financial ReportingA Practical Guide may be found on the IAA’s website (www.actuaries.org). The price for a hard-bound copy, including access to a searchable electronic version, is $150. The electronic text alone is $75. In keeping with the IAA’s educational mandate, university students with appropriate documentation may access the electronic copy for free.

The IAA extends its thanks to all members of the CIA for their support of the Discount Rate Project and other actuarial education initiatives.

The CIA has arranged a special discount for you: all you need to do is log in as a member on the IAA website and order your book. The discount will then be applied.

David Congram, FCIA, is a member of the Committee on International Relations, and a member of the IAA Executive.

 

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