IFRS 4 Phase II: why you can’t afford to wait


There are times when ‘wait and see’ is the ideal strategy. Research shows, for instance, that some forms of prostate cancer are so benign that doing nothing except monitor is genuinely the best way to avoid harm. But with IFRS 4 Phase II, on accounting for insurance contracts, it is definitely not a good option for large insurance companies.

Why not ‘wait and see’?

IFRS 4 Phase II has been under development for a long time, well over 10 years. So perhaps a little skepticism about its eventual arrival is justified. But it does look as if the waiting is now over. The new standard is expected to go live in 2020, or possibly 2021, but certainly no later. Those who have been watching and waiting for a while do now need to start taking action. The clock is already ticking.

Reporting in 2020 will be based on 2019 data. In practice, this means that all your data in 2019 will need to be prepared in a way that is consistent with the new regulation, which means that you need to have worked out how you are going to do that well in advance. Ideally, you need to have tried it out first, at least once. As the new regulation includes new approaches to valuation of assets and new financial reporting, this may not be as easy as it sounds.

With IFRS 4 Phase II, it is definitely not a good option for large insurance companies to "wait and see".

With IFRS 4 Phase II it is not a good option for large insurance companies to "wait and see".

One issue is that these new reporting standards might lead companies to take a completely new view on their financial position. And a completely new view will probably require some time to realign the business strategy to fit the new financial statements. You need to know in plenty of time to avoid problems when reporting goes ‘live’ in 2020. The big consulting companies recommend that insurance companies should be running reporting in parallel for at least one to two years to avoid problems.

New data requirements mean new IT issues

But it is not just strategic alignment that is likely to be an issue. Actually getting the new standard implemented will probably lead to more than a few operational issues. For example, the new standard looks likely to require insurers to calculate the value of their insurance liabilities on a contract level, instead of portfolio level as is currently required under Solvency II in Europe.

These new ways of calculating values are likely to lead to more need for IT systems. Current legacy systems may well struggle to generate data at that level of detail, because it has never been required before. It is always hard to extend the requirements on a system that is already struggling to support existing data requirements. If you are using a legacy system, it makes sense to start IFRS 4 Phase II implementation early, to pick up any potential problems while there is still plenty of time to address them.

Particular concerns in Europe

In Europe, there is another reason for insurance companies to worry. Solvency II has only been in place since the start of this year, and many companies are seeing teething problems with its implementation. They are still in the process moving their Solvency II efforts into ‘business as usual’. And although Solvency II and IFRS 4 Phase II are two completely different stories, many European companies will need to comply with both going forward.

And Solvency II and IFRS 4 Phase II are anything the same. They will generate different balance sheets, which creates two sets of problems. The first is that the two different balance sheets will need to be reconciled. The second is that business strategies need to be aligned with both, which may mean finding a balance between the two, and working out what needs to change as a result of that.

Take advantage of time

That is going to take time. In other words, to go back to my original point, companies really cannot afford to wait any longer before they start to work on implementing IFRS 4 Phase II. ‘Wait and see’ may have served insurers well for the last few years, as the standard was developed. But now it is here, and implementation is a mere four years away, it is no longer a good option.

Implementation may turn out to be simpler than expected. But it may not, too. And having time in hand is always going to be good news if that happens. You really can’t afford to wait any longer.

Explore how SAS Institute takes a comprehensive approach to accounting for insurance contracts, ensuring compliance with IFRS 4 Phase II.

Learn more about the evolution of risk

Traditionally, risk management has been to manage mostly market risks (i.e. interest rates, etc.) while in insurance risk management has been about both the asset side (market risk) and the liabilities side (underwriting risk). Consequently, In banking, risk management has mostly been closely related to daily business. Conversely, in insurance, risk management has mostly been the domain of actuaries on the liabilities side , used for rate making and reserving and by asset managers mitigating performance risk. This means that for insurers it was always more difficult to align these two sides and they mostly worked in a silo-oriented way.

With increasing regulation and greater demand for compliance, risk management has moved even closer to the day-to-day business of banks and insurers. Financial institutions need to learn to keep the balance between highly sophisticated models , which could only be understood by mathematical experts like actuaries, and content that is still digestible for the key decision makers in the organization.

SAS experts will be on a Twitter discussion to explore further the evolution of risk. This open discussion is open to anyone interested in the widening scope of risk mitigation. We will be using the following prompts to navigate the discussion. Simply follow the #saschat hashtag from 15hrs CET on Friday 2nd December.

  1. What have you seen as consistent approaches between are banks and insurers towards risk management?
  2. How are they progressing towards a consistent and integrated model environment for compliance and stress testing?
  3. Who are stakeholders versus drivers? How do they differ between banking and insurance?
  4. What are the critical skills and tools to drive coherent modelling, simulation and deployment?
  5. What have you found to be the biggest barriers to a consistent approach?



About Author

Principal Product Marketing Manager

Thorsten Hein is a Principal Product Marketing Manager in the Risk Research and Quantitative Solutions Division at SAS Institute. He specialises in global risk management operations insights in both banking and insurance, focusing on risk and finance integration, IFRS, Solvency regulations and regulatory reporting. He helps risk management stakeholders to go beyond pure regulatory compliance and drive value-based management to maximise business performance, using his wide experience to deliver both business relevance and technical coherence.

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