The world of financial reporting for insurers has never been this close to the edge.
There is more change brewing now even than when Europe adopted “European Embedded Values” and later “Market Consistent Embedded Values”. The irony is that Embedded Values may well fall away as a result of the latest change.
So what is changing?
- Solvency Assessment and Management (SAM) is still planned for 2015 in South Africa. SAM will change the calculation of actuarial reserves, or Technical Provisions as they are now known, for regulatory reporting purposes. Solvency II in Europe is now likely to follow rather than precede SAM by a few year, but with nearly identical implications.
- IFRS4, the accounting standard covering insurance contracts, is due for a radical change effective in 2016/2017, although this is years later than originally planned. IFRS4 “Phase 2” as it is referred to throws out most of what we’re used to in terms of profit recognition, financial impact of assumption changes, impacts of asset and liability mismatches and may very well push insurers to value their assets on a different basis.
- IFRS9, a new standard replacing IAS39 and covering financial instruments, whether these are assets or liabilities, will poke and prod insurers into different decisions now and possibly before knowing exactly how IFRS4 will pan out.
- Finally, although this part is still speculative, Embedded Value reporting may fall away as SAM and Solvency II achieve much of the objections of Embedded Value.
This post is the first in a series covering important aspects if the change in financial reporting standards, covering news of the developments as it emerges as well as the likely implications for financial reporting, product design, ALM, financial reinsurance and others. I’d encourage you to post comments or questions on this or later posts and I’ll try to answer those through the series.
- Part 1 – IFRS reporting under SAM
- Part 2 – EV in a SAM/Solvency II world
- Part 3 – Apocalypse! – SAM as the tax basis
- Part 4 – Acquisition accounting under IFRS4 Phase II – a little speculation
Life Expectancy is going up. In general. But what really matters isn’t the general but the specifics. I know it’s hard to work through maths and actual calculations, but it doesn’t help if you run your analysis off slogans.
US Life Expectancy is going up. But not as much “at retirement” as it is up “at birth” because all the improvements in infant mortality are irrelevant at retirement. Similarly, mortality improvements aren’t the same for all income bands. The detail matters when it comes to trillions of dollars of social security.
I haven’t posted in ages – plenty happening on the work front, which is mostly good news. I also don’t really have time to comment properly on this article but Wits academic, Robert Vivian, but it’s interesting reading all the same.
Read Vivian’s letter first and then come back to my comments.
I can’t help but feel Vivian doesn’t actually understand the rationale for the proposed system and therefore gets a little frothy at the mouth about how awful it is. That’s not to say his criticisms shouldn’t be taken seriously – there are flaws in the proposed approach but it’s not clear to me that these are worse than a system that moves at the pace of continental drift because of exceptionally slow Parliamentary processes.
This maybe reflects a imperfectly functioning legislative process, which is a separate issue to discuss entirely.
It also reflects the reality that very few in Parliament (our country and most others I would imagine) have the time or technical knowledge to influence many of these laws anyway. Requiring a parliamentary process may not actually change the law-making function.
The final point here is that there is precedent here from a European perspective, so we’re not totally out on a limb in South Africa.
Maybe Vivian could rather suggest some tweaks that put his mind at ease about sentencing individuals to death by law without returning us to a stagnating world of too-slow legislative changes?
So, as I expected given the fundamental changes to IFRS 4 in recent months, the IASB is doing the grown-up thing and is re-exposing the latest version of the insurance accounting standard
later this year early next year.
They are restricting questions to areas that have changed or where final decisions haven’t been made, which I suppose is also fair enough and ensures focus is on the key new areas.
Re-exposure for a period, analysis of comments, reworking of any sections as a result of those comments… There is still a fair amount of work to be done!
Implementation 2016 / 2017 is most likely.
A client was asking about the key changes coming up for SAM Interim Measures. This document (from the FSB) is about the best summary I’ve seen: Interim Measures Update (Governance)
My take on this is that the FSB is basically expecting compliance or a pretty concerted effort and reasonable compliance with these requirements NOW. The original plan was for these to go live in 2012. That was for good reason – it will take a while to polish these up and there is plenty more required before full implementation of Pillar Two requirements.
Apparently the Insurance Laws Amendment Bill is still with National Treasury and is unlikely to be passed by Parliament this year. So breathing space if you’re not currently compliant, but also time to get a move on and get these things in place.
All I can say is financial reinsurance that is just smoke and mirrors is just smoke and mirrors. More small insurers should take advice from someone other than their reinsurers when evaluating financial reinsurance in terms of its financial, regulatory and capital implications. Financial reinsurance doesn’t typically cause financial problems but it can gloss over and hide genuine problems.
Lots on this topic to come over the next few months.
Insurers around the world are dealing with increased regulations and increasingly nervous regulators, just waiting for the next crisis to see how insurers will cope. In South Africa, SAM presents opportunities and challenges and the potential for a great deal of expense with limited direct business benefits.
Of course, the regulations in some form or other are coming and are likely to stay. The Actuary magazine has an article on some of the lessons for insurers and regulators about how to actually get some control and understanding of macro and systematic risks within the new regulatory models.