IFRS for insurance contracts: Consistency with Solvency II

The legislative basis for Solvency II is now in place and the focus has moved on to the ‘implementation measures’ through which the directive will be applied in practice. There are ongoing consultations over the measurement of assets and liabilities under Solvency II (CP 35 examines measurement and the related CP 30 looks at the basis for the inclusion of future premiums – www.ceiops.org), the debates over which have close parallels to IFRS.

Benefits of alignment

The key issue is the extent to which the approaches to valuation of liabilities under Solvency II and IFRS are consistent (this is still up for debate). There is also a continuing debate over how much of the financial statement disclosure can be used as the basis for Solvency II reporting. Close alignment would open up valuable synergies in data management, modelling and investor relations and enable companies to avoid the expense and disruption of ‘digging up the road twice’.

Implications for investor relations

Even if the measurement approaches under IFRS and Solvency II are reasonably consistent, some divergence is inevitable as Solvency II covers the entity as a whole rather than just insurance contracts as defined by IFRS. The primary purpose of the directive is also to safeguard against the solvency risks of failure to meet policyholder obligations rather than conveying the performance and profit potential of the business as under IFRS. Companies will therefore need to anticipate any inconsistencies and explain the nature and implications of these to analysts, investors and other key stakeholders.