Insurers urged to consider IFRS alongside Solvency II

Firms in the insurance industry working towards Solvency II compliance need to be aware of proposed changes to International Financial Reporting Standards (IFRS), accountant and insurance adviser Moore Stephens has warned.

It said these could fundamentally affect the accounting treatment of insurance contracts.

It also warned that firms should identify synergies between the IFRS proposals and Solvency II, and adapt existing implementation programmes.

July’s IFRS 4 Phase II Exposure Draft on Insurance Contracts sets outs significant accounting and systems changes which, if ratified, will require a comprehensive implementation programme. It is still subject to debate and is not yet final, but it is hoped to run concurrently with Solvency II.

Moore Stephens director Charles Portsmouth said: “Both Solvency II and IFRS are intended to improve transparency and comparability of insurers, regardless of domicile, product or sector, and both have adopted a similar approach to the measurement of insurance liabilities using unbiased estimates of all future cashflows. But there are differences, which will mean additional systems requirements over and above those being developed for Solvency II.

“This may impact on issues such as the inclusion of a residual margin to offset any day one profits which are not allowed under IFRS 4, the modification of reserves for short duration contracts, the unbundling of certain insurance liabilities to reflect contracts not transferring insurance risk under IFRS 4, the differing treatment of expenses, and differences in the discount rates and liquidity premiums being applied to technical provisions."

Portsmouth continued: “Planning is essential in order to develop an understanding of the complexity and scale of the changes that might be required. A high-level impact assessment will identify key accounting and disclosure changes, systems and business impacts, and the scope of work required, particularly with regard to IT systems. Synergies will need to be sought in data management, modelling and external disclosures to ensure that efforts are not being duplicated.

“IFRS 4 Phase II has increased significantly the challenges involved in meeting the Solvency II time-frames. But early planning will lead to more cost-effective implementation in the long run. Priorities should include awareness training at senior management level, followed by an initial gap analysis in terms of accounting systems.”