Since 1st January 2023 it is in effect the new insurance standard, IFRS 17 and European insurers applying IFRS are preparing to report under the new regime in parallel with the Solvency II requirements.
These two frameworks serve distinct purposes:
- IFRS 17 focuses on financial reporting, capturing both point-in-time balances and performance over the reporting period.
- Solvency II is designed for capital adequacy, emphasizing the valuation of insurance liabilities to ensure financial stability.
While IFRS 17 is principle-based, Solvency II follows a more prescriptive approach. Despite these differences, both share similar measurement methodologies.
Solvency II vs IFRS 17: key differences and objectives
Different objectives and scope of Solvency II and IFRS 17
IFRS 17 is aiming at financial reporting of insurance contracts covering point of time balances as well as financial performance throughout the reporting period, while SII is focusing on the valuation of insurance contracts for capital adequacy purposes.
Despite the different objectives as well as the fact that IFRS 17 is principle based while SII is a much more descriptive framework, both regimes have similar measurement approaches. The key sources of differences are related to risk adjustment versus risk margin calculations, the development of discount factors, the treatment of day one profit or losses, the level of aggregation as well as cash flows within scope.
Maximizing consistency and synergies between IFRS 17 and Solvency II
Solvency II will remain the key framework to manage long term insurance business. However, at the same time that insurers are trying to increase consistency and synergies between the IFRS 17 and SII calculations, it is also increasing the need for understanding and explaining the respective differences.
Reconciling IFRS 17 and Solvency II calculations for Financial Reporting
Analysts and other stakeholders ask to reconcile between shareholders IFRS equity and SII available capital / Net assets.
For that purpose and considering the respective accounting policy choices, one needs to account for more discrete items like the unrealized gains or losses, goodwill and other intangibles, subordinated debt or the CSM balance after tax but also for differences in the valuation between the two frameworks.
More specifically, insurers are trying to quantify the differences coming from different valuations between RA and RM, the differences in the discount factors applied or the changes in the perimeter.
Such calculations require the ability to use centralized data and apply scenario analysis and multiple runs in an efficient way.
Similar with the above, the new systems and reporting processes will also need to be able to produce reconciliations between the IFRS 17 operating profit and SII capital generation metrics.
All the above are coming on top of the already demanding IFRS 17 disclosures requirements and test the new operating models and processes the entities are building the last years to respond to the IFRS 17 application.
Article written by:
Harry NIKOLAOU
Head of Accounting IFRS 17
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