2015-04-29
The high demand for actuarial resources in the last three years has as we all know been partly fuelled by the solvency II deadline.  Now that most companies are near to being compliant in this area solvency II will soon enter more of a maintenance mode except for those companies that start to switch away from standard model and that will bring a new wave of work. So the next area of work outside of BAU that will use up actuarial resources is IFRS4.  For those of you less familiar with this area here’s a brief introduction: What is IFRS 4 (Phase II)? In 2004 the International Accounting Standards Board (IASB) issued an International Financial Reporting Standard called IFRS 4, which provides guidance for the accounting of insurance contracts. IFRS 4 applies to almost all insurance and reinsurance contracts that an entity issues or holds. However, the accounting requirements for insurance contracts under IFRS 4 does not provide users with the information they need to significantly understand the financial position of the insurer, its performance and its risk exposure as compared to other commercial organisations. In 2010 the IASB issued first exposure draft of IFRS4 Phase II which will address this issue and replace IFRS 4. The latest revised Exposure Draft was issued in June 2013 and final publication is expected to be issued in the coming months and will be implemented on the 1st of January 2018, allowing insurers three years to prepare. Effectively IFRS 4 Phase II will change how insurers account for income and liabilities from insurance contracts and it intends to bring greater comparability to national approaches to liability measurement. The standard is largely unchanged from current IFRS 4 - it applies to all contracts that meet the definition of insurance. The new accounting standard is expected to be limited to five key areas:
  • Treatment of unearned profit in contracts
  • Treatment of participating contracts
  • Presentation of premiums in the income statement
  • Presentation of the effect of changes in the discount rate in other comprehensive income
  • Transition by retrospective application.
There are some similarities between the requirements for IFRS 4 Phase II and Solvency II, which may result in the opportunity for synergies. However, Phase II introduces a number of requirements which go beyond the scope of Solvency II.  At a practical level preparation for insurance companies will include major restructuring of IT systems and financial management processes, which according to a number of papers issued by consultancy firms will take up to 2 years to implement. Here we go again….