IFRS Insurance Accounting & Solvency II |
IFRS Insurance Phase II
Since November 2008, the IASB and FASB have been working extensively to create the first global GAAP on insurance contracts. An Exposure Draft of the new accounting standard for IFRS was issued by the IASB in July 2010; the FASB published the same document under the cover of a Discussion Paper in September 2010 where it addressed the future of US GAAP for insurance. The comment period for both papers ended on 30 November 2010 and more than 300 responses were sent to the two Boards showing significant engagement from the insurance industry on this key issue. The Boards are now redeliberating the Exposure Draft in light of these comments and the IASB expects to publish the final Standard in June 2011 when the FASB expects to publish an Exposure Draft that will converge US GAAP with IFRS. We expect that the new requirements will not be effective earlier than 2014 year-end; though no mandatory implementation date has been announced yet.
How will the new accounting standard affect investors?
The new accounting standard will attempt to provide investors using IFRS with a more relevant valuation of the portfolios of insurance contracts, which draws on a ‘fulfilment value’ principle. This principle aims to represent the profit that insurers make from assembling insurance portfolios and managing the associated risks their customers have transferred to them. Transparency will be the most innovative feature of the new accounting regime with the mandatory ‘3-building blocks’ approach to estimate future cash flows and their probabilities (block 1), discount them with market rates (block 2) and adjust the resulting estimate with a risk adjustment liability based on the underlying uncertainty combined with a residual margin liability that captures future profits embedded in the portfolio (block 3).
How will the new accounting standard affect insurers?
The new IFRS for insurance will radically change the way insurance businesses present their profit and insurance liabilities by introducing transparency, global comparability across jurisdictions and consistency with market variables whenever possible.
The magnitude of the change is likely to be extensive for all insurance businesses reporting under IFRS and it will become mandatory when several other IFRS are changed including those on financial assets, revenue from customers and leases. The extent of the implementation could offer an opportunity to use it as a vehicle to more closely align financial reporting with the way insurance companies are run. Insurers must be prepared to introduce significant changes to processes (including valuation and financial reporting processes) and upgrades to IT systems (including actuarial modelling and data warehousing) if they want to reap the maximum benefit from this reporting revolution.
IFRS Phase II and Solvency II
For those insurers with business in the European Union (EU), the case for a comprehensive implementation plan is even more compelling. The insurance regulations in the EU are due to change in the same timeframe the new IFRS will be mandatory and the EU regulators have taken inspiration from the IASB work (the 3-building blocks approach) to develop the valuation for insurance liabilities under the new regime known as Solvency II.
The Deloitte approach to IFRS
Preparing for, implementing and embedding the new reporting regime is a challenge that calls for a multi-disciplinary approach. At Deloitte, we are able to provide insurers with the required breadth of service from accounting to actuarial, from change management to system implementation, from regulatory interdependencies (crucial for Solvency II insurers) to tax. All these are offered with a depth of expertise that ensures all aspects of the new reporting requirements are complied with and that every opportunity is identified and seized.
