Insurance Finance Modernization: Preparing for finance, risk and actuarial change

Recent developments, including separate proposals by the IASB and FASB for insurance contract accounting, regulatory developments (including the RMORSA model law), principle-based reserving (PBR) proposals, and G-SII and non-banking SIFI designations are compelling insurance companies to re-evaluate all aspects of their business model and operations.

These developments will require more sophisticated financial reporting, risk management, and analysis to address complex measurement and disclosures, regulatory requirements, and market expectations. Accordingly, there will be increased demands on the finance, risk and actuarial functions, as well as potentially significant impacts to business strategy, investor education, underlying processes, systems, internal controls, valuation models, and other fundamental aspects of the insurance business.

Insurance Contracts

The FASB and IASB have recently released proposals represent a potentially transformational change in the way that insurance contracts are measured and reported in the financial statements. The implications of the proposed standards on the insurance industry will be significant, and their adoption will affect business strategy, investor education, underlying processes, systems, internal controls, valuation models, and other fundamental aspects of the insurance business.

It will be critical for insurers to work closely with stakeholders to make sure that they understand the impact of the significant changes being proposed as this may be the last opportunity for the industry to influence the debate before the FASB proceeds to a final standard in late 2014 or early 2015.

Risk and Regulatory Changes

The NAIC's US RMORSA (Risk Management Own Risk and Solvency Assessment) requires insurers to conduct a detailed appraisal of their strategic risk management. We believe it is important for insurers to avoid viewing the ORSA as just a compliance exercise, and instead use the assessment to improve perspectives on their ERM practices, make any necessary improvements to their risk framework, and – above all – gain a thorough understanding of their risks and how they affect the business.

Last but not least, the RMORSA - especially when combined with G-SII and non-banking SIFI designations - is compelling insurance companies to re-evaluate not just risk management, but also regulatory compliance and oversight.

Principles-Based Reserving (PBR)

PBR is a fundamental and comprehensive change to the way companies perform valuation. However, current realities are placing many competing demands on actuarial resources, including the aforementioned ORSA and the new insurance contracts standards. As companies begin to plan for their adoption of PBR, the amount of effort it will require could surprise many management teams. Although it may not be effective until year-end 2015, the timeframe for implementation is actually quite short considering the amount of effort involved. Accordingly, in order to avoid greater challenges as the deadline shortens, companies should start preparing for PBR now.