How to reconcile between Solvency II and IFRS 17 key figures

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.

Different objectives and scope

The two regimes are aiming at different objectives and have different scope. 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.

Consistency and synergies between IFRS 17 and SII calculations

Going forward it will be easier for insurers to manage their business more consistently between the two frameworks. For that purpose, many have opted for accounting policies and methodologies that are consistent with the SII framework. For instance, European insurers are often using cost of capital methodology for the risk adjustment calculation, the bottom-up approach for the discount rates calculation and expand the attributable overhead costs definition.

SII will remain the key framework to manage long term insurance business however the same time that insurers are trying increase consistency and synergies between the IFRS 17 and SII calculations, it is also increasing the need for understanding and explaining the respective differences.

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.

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