Companies continue to anticipate the planned introduction of the FASB’s/IASB’s Measurement of Insurance Contracts standards and Solvency II's Pillar 3 requirements. Several reporting methods are under consideration. While differences exist between the FASB and IASB on various aspects, their current approaches or a consensual approach could profoundly alter future reporting requirements. As companies embrace these new approaches, many challenges lie ahead.
Efficiently integrating new requirements into a reporting environment requires a flexible enterprise reporting strategy, which most organizations do not have. An effective enterprise reporting strategy places you in the best position to accommodate reporting changes as they occur without having to reconfigure, customize or re-implement systems.
Measurement of Insurance Contracts. The FASB and IASB have agreed on the principle of valuing insurance contracts according to their fulfillment value. Moreover, these proposed changes may not negate local country statutory reporting requirements. System modifications integrating those potential approaches are likely to have the greatest impact on actuarial or investments systems. Some organizations may have to alter or develop modeling tools to meet these requirements. All these tools and applications must be production ready and meet audit criteria. Some general ledger and data repository changes may also be necessary, as they could conflict with currently designed implementations.
Solvency II. Pillar 3 disclosure requirements include thousands of data elements to populate Quantitative Reporting Templates. Many of the QRT data elements reflect data elements that existing reporting environments capture, but may not be sufficiently granular to support Pillar 3 requirements. Insurers will use QRTs for analytical purposes to support the preparation of the Regular Supervisory Report and the Solvency and Financial Condition Report. The RSR's qualitative disclosures include information on exposures to different risk categories not typically captured in general ledger systems or data repositories and may require new applications. In particular, the extensive disclosure requirements for investments merit early consideration, whether or not third-party fund managers are involved.
Close to Report. The expected insurance contract and Pillar 3 reporting requirements coincide with existing external financial reporting timelines and place additional demands on staff and systems resources. Some quarterly QRTs have a five-week filing requirement after each quarter's end. Other annual QRTs have a 14-week filing requirement after the year's end. Some QRTs may be subject to audit. The RSR filing requirements currently anticipate an initial annual reporting requirement followed by a tri-annual requirement thereafter. The SFCR has an annually filing expectation. Both the RSR and SFCR have a 14-week filing requirement after the year's end.
Responding to new challenges
New reporting/disclosure requirements and converging financial reporting timelines further emphasize the need for an enterprise reporting strategy that:
Provides efficient Close to Report processes.
Key steps in integrating these characteristics into an enterprise-wide reporting strategy include:
The new Insurance Contract measurement model or Solvency II Pillar 3 requirements represent a significant change to existing reporting requirements. A frank assessment is needed to determine if your current reporting strategy is able to meet these changes. Shorter-term steps can strengthen an enterprise-wide reporting strategy through scheduled system upgrades. Some leading software vendors are developing reporting packages to capture QRT data elements and produce templates. Longer-term efforts typically require new systems implementations or re-implementations depending upon prior configuration choices and customizations.
Michael Wicke is a director in the insurance practice at PwC.
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