The synergy of a coordinated approach
For insurance companies, it makes sense to take a coordinated approach to the implementation of both directives, given the significant overlaps in requirements. There is no requirement for correlation between regulatory and financial reporting, but there are significant overlaps in both measurement and disclosure requirements between frameworks.
Changes in performance management
Given the similarities in the rules, insurers need to improve their understanding of the differences between Solvency II and IFRS to effectively manage their business. For example, the primary focus of Solvency II is capital adequacy rather than profitability management. Your finance unit can help you negotiate this challenge by explaining the differences between the summarized margin approach from IFRS 17 and the profit-and-loss reference under Solvency II.
Business planning and forecasting models must be adapted to the new external reporting requirements and models for evaluating potential investments and acquisitions. Informing and educating external stakeholders, including analysts, will be a major challenge during the transition period. Clear and transparent communication will help stakeholders navigate through the changes in regulatory and regulatory reporting, improve trust and help mitigate any adverse impact on stock prices and ratings.
Minimizing the impact on systems and data
Both frameworks require insurers to invest in data quality, control and management. The content and structure of data collected from business units to support the group’s regulatory and regulatory reporting will change significantly. This will require major changes to the Group’s financial consolidation and reporting systems.
In addition, changes in the primary financial statements and information will be affected by the general ledger and the chart of accounts at group and business unit level. You will also need to consider solutions to support parallel reporting of IFRS 4 and IFRS 17 results during the transition period and provide ongoing Solvency II, local GAAP and local regulatory reporting (as needed).
The data requirements for IFRS 17 correspond to Solvency II and address many of the potential data gaps in IFRS 4 (for example, data to model future premiums, benefits from participation, options and warranties). Solvency II also requires insurers to invest in data quality, control and management; However, there are differences in the details (such as the definition of a portfolio, contract boundaries and separation). A key challenge will be to ensure that these different types of data are available and that systems have the flexibility to accommodate differences in inputs to cash flows between the two frameworks.
Process and Government Considerations
Under IFRS 17, accounting policies must be standardized and you will need to ensure that compliance processes can be audited. IFRS 17 has raised benchmarks in terms of governance and quality of documentation required to facilitate a seamless audit sign. But insurance companies also have to abide by the governance and control framework of Solvency II in terms of policies, assumptions and calculation methods.
Differences in reporting and disclosure
Insurers will need to be careful when planning a common approach to reporting and regulatory disclosure standards for both sets of requirements. Despite similarities between IFRS 17 and Solvency II, there will be challenges in implementation. You may need to consider different approaches when reporting your organization’s risk profile (i.e., IFRS 17 versus Solvency II). Detecting these differences requires a mature understanding of the insurance industry as well as accounting, reporting and information to get a smooth implementation.
The challenges ahead
Although the details (contract identification, approach to metrics, reported goals, responsibilities, etc.) are different, the basic data, structure, audit capability and traceability of processes and support systems are similar. Both regulations require the implementation of an end-to-end approach using an integrated framework. An integrated approach will also be needed to best support the reconciliation of external, managerial and regulatory reporting for both IFRS 17 and Solvency II.
Unfortunately, organizations that have not yet implemented Solvency II cannot benefit from any of these synergies. And IFRS 17 is likely to pose even greater implementation challenges.