Global

Details

  • Industry: Financial Services, Insurance
  • Type: KPMG information
  • Date: 6/27/2014

Taking some pain out of IFRS 4: Harnessing Solvency II to create efficiencies 

Harnessing Solvency II
European insurance CFOs have a number of significant reporting changes to navigate over the coming years. They are facing some of the most stringent regulatory changes ever to be unleashed on the insurance sector in Solvency II, which is due to come into force in 2016. They are also shifting their financial reporting to a new insurance accounting standard (known as IFRS 4 Phase II), which could be in force by 2018. At the same time, a new accounting standard for financial instruments (IFRS 9) is also expected to become mandatory by 2018. The next few years may not be easy.

Not surprising, then, that insurance CFOs are looking for opportunities to reduce the cost, effort and resources needed to achieve compliance across both mandates. “We can see that managing both programs of work separately is going to put significant strain on our existing resources and, potentially, could result in two very different views of our group’s financials,” Danny Clark, Global Accounting Change Lead, KPMG in the UK as heard from a client. “After all that we have done to prepare for Solvency II, we simply don’t have the resources or the time to kick off another equally complex finance transformation project.”


Overlaps and opportunities

What many insurance executives are finding is that there are significant similarities between Solvency II and the new insurance accounting proposals. Both require similar balance sheets which, while some differences certainly exist, in turn require similar processes, data, assumptions and modeling. There is little difference, for example, between the calculations non-life insurers would use to value their claims liabilities under the two methods.


Most insurers will find the overlap considerable. In fact, our experience suggests that insurers may be able to cut their IFRS 4 Phase II implementation effort by almost half if they combine their Solvency II and IFRS 4 programs; similar efficiencies could be brought to bear in the management of ongoing post-implementation reporting. And, it’s not just in Europe that insurers have an advantage. A number of other countries have introduced (or are in the process of introducing) capital regimes based on current valuations of assets and liabilities. In many cases, these will also provide a springboard for the valuation of insurance contract liabilities under IFRS.


But saving costs and reducing duplication are not the only reasons for insurance CFOs to consider combining their implementation programs. The reality is that stakeholders – investors, regulators, customers and media – will be carefully scrutinizing both balance sheets and any difference will need to be quickly and adequately explained. This is not easy when so many of the regulations are changing (solvency, assets and liabilities) – there are interdependencies between how insurers account for their assets and liabilities that are essential to manage in order to avoid unwanted volatility in the accounting results.


Having a single governance process that looks at the entity’s reporting under both frameworks together and uses a single set of analytical reviews and a single set of approvals will ensure that any inconsistencies are identified, discussed and thoroughly understood by management before being published.

Time for action

While the benefits of combining the programs are clear, our experience suggests that few insurers have yet to start working towards reaping those synergies. In large part, this is because significant uncertainty still surrounds the final insurance contracts standard. However, with redeliberations progressing and the final standard expected in the first half of 2015, any remaining uncertainty should quickly disappear.


Others are taking more of a ‘first things first’ attitude and focusing all of their efforts on becoming compliant with Solvency II – which becomes effective as of January 1st 2016 – rather than IFRS 4 Phase II which may not come into effect until 2018 at the earliest.


This, in our opinion, may not be the wisest strategy: there is already more than enough clarity in the current insurance contract proposals to allow insurers to properly identify the synergies; any Solvency II work that takes place without – at the very least – incorporating the future requirements of IFRS could result in wasted or duplicative effort.

Preparing for advantage

There are a number of insurers, however, that are making significant headway. Many are using this time ahead of the announcement of the final standard to conduct high level assessments of how they are going to use their Solvency II data and processes to meet their future IFRS 4 requirements. Others are looking carefully at the current insurance contract proposals to see how different interpretations allowed within the proposals may be applied in order to maximize the reuse of Solvency II data.


We believe insurers should also be taking this time to consider how IFRS 4 Phase II may impact their operating models within finance and actuarial services. Indeed, the implementation of both Solvency II and IFRS 4 phase II will bring about new demands on data, additional requirements for actuarial modeling, and potentially hundreds of new processes to run, all of which will put strain on existing resources and require new ways of working. Some may even decide (if they haven’t already) to fold their actuarial and finance departments into a single business unit to enhance efficiencies after implementation of the new requirements.


There will be advantages for some; aligning accounting for insurance globally makes the business case for managing financial reporting centrally stronger for example.

Seeing the way forward

Once insurers are able to conceptualize their new target operating models, we believe a prudent next step is to develop a well-understood roadmap to coordinated implementation that not only identifies the tactical implications such as the production of data, but also the wider effects including the impact on dividend paying capability, product pricing, investor relations and capital market communication.


Those that are able to integrate their planning should then be well prepared to reap the efficiencies offered by the overlaps between IFRS 4 Phase II and Solvency II. Those that do not will find the next four years to be an unnecessary struggle.


By Danny Clark, KPMG in the UK, Peter Ott, KPMG in Germany and Viviane Leflaive, KPMG in France.

 

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Danny Clark

Danny Clark

Global Accounting Change for Insurers Leader

+44 20 73115684