New York — To avoid the risk of being unprepared to for the expected industry-wide shift in mindset and processes due to the expected onset of International Financial Reporting Standards (IFRS) requirements, insurers need to gear up with a proactive approach.
So says New York-based consultancy Deloitte LLP in its new report, “The IFRS Journey — A Look Beyond the Accounting Changes,” which provides insight about the role of IFRS in the insurance industry through a review of key business strategies and critical issues facing insurers.
Despite the continued debate regarding the benefits and the challenges of IFRS, in an era of increased globalization, IFRS has emerged as the global accounting standard. To date, more than 100 countries have adopted, or have convergence plans with, or allow the use of, IFRS. In the United States, IFRS are already used by subsidiaries of foreign filers and joint ventures, driven by the ultimate foreign filer requirement under IFRS.
“It is expected that by 2011, U.S. companies will have the option of using IFRS, and almost every country around the world could be using IFRS to some extent,” says Priti Rajagopalan, manager, Deloitte Research, and author of the report.
This growing acceptance of IFRS as the global standard is placing pressure on U.S. and international companies not using IFRS to consider making the transition, notes Rebecca Amoroso, Deloitte’s national insurance leader. “For insurers, the process becomes even more complicated due to the unique handling of insurance contracts and associated risk under the new guidelines,” she says.
These changes will give rise to pressure for both convergence and divergence across insurance lines, thereby adding complexity and dynamism to the market structure of the insurance industry, says Rajagopalan in her report.
“Because one of the key goals is to help companies develop a more realistic and economically informed view of their operations, IFRS could provide insurers with new insight into the profitability and risks of their business, which, when used to develop strategy, can be invaluable,” Amoroso explains.
Specific findings from the report include:
- The information made available by adopting IFRS reveals more about the profitability of new business when it’s written, as well as the risks and uncertainties associated with individual business lines and portfolios, to competitors
- Modeling of liabilities, especially for non-life products, will be more complicated because these lines have weak observable market data, high volatility and potentially large payouts
- A fair value-like approach to measuring liabilities under IFRS will encourage insurers to reduce asset-liability mismatches and focus more on their investment strategies
- IFRS will create opportunities to improve internal controls, and increased transparency will support improved risk management
- IFRS may act as a key catalyst for insurance-linked securitization, including securitization of closed books of business
- IFRS may encourage M&A activity, and may play a major role in improving the quality of the M&A process by adding value at each stage of the process
- IFRS could cause significant requirements for investment in new technology
- IFRS will cause a talent gap in the CFO suite, regulatory bodies, accounting, actuarial practices and the SEC
- Over the longer term, IFRS will promote much greater cross-border mobility of people by removing the differences between national accounting systems
Insurers embarking on the IFRS journey will have their hands full understanding the new policies and keeping pace with changes required throughout the organization, including in accounting and financial reporting, finance/treasury, investment management, risk and controls, performance and decisions, actuarial and claims management, and tax, among others, notes the report.
Meanwhile, IFRS for insurance contracts will increase volatility in financial reporting statements, and enable consistency and transparency of reporting across insurance entities. These factors, combined with regulatory mandates such as eXtensible Business Reporting Language (XBRL), solvency-related requirements and increasing attention on risk management, will raise the level of transparency around the financial performance of insurers to new heights.
The U.S. Securities and Exchange Commission already provides incentives for companies choosing to use XBRL for reporting to the agency.
“I believe XBRL will likely kick in long before IFRS [does] for U.S. registrants, so it’s not going to be a major driver toward IFRS,” Rajiv Basu, U.S. head of insurance IFRS, tells INN.
Further, regulatory mandates such as XBRL will reinforce the trend toward improved management of the business, specifically by bringing a consistent taxonomy for data items across the reporting supply chain and across software products, thereby allowing information sharing instantly and directly, within organizations and between companies and all of their different stakeholders. For example, the eventual implementation of
XBRL is intended to lead to better data management, enabling management to make more timely and informed decisions. XBRL also will provide greater transparency to boards of directors, potentially enabling them to provide better oversight. Additionally, creditors may receive more timely, frequent and consistent credit and covenant compliance analyses, which may substantially improve credit risk management.
“When IFRS comes along, it will be interesting to see what happens to XBRL, i.e. how will XBRL be adapted for use in a principles based world (it’s designed for use in a rules-based world),” says Basu. “It’s hard to predict.”
Rajagopalan points out that whether or not an insurance company concurs with the overall merits of IFRS, it behooves its management to consider carefully the potential implications of the widespread implementation of IFRS in the industry.
“By taking a proactive approach to understanding how the implementation of IFRS will impact key areas of insurers’ business strategies, management can avoid the risks of being blind-sided and seize the new opportunities IFRS presents for differentiation and competition,” she says.
Source: Deloitte LLP
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