Why are the new IFRSs too important to be ignored?
Why focus on them now? Financial institutions and insurers in particular should prepare now that the implementation timeline is more certain.
- The re-writing of five major IFRS is nearing completion and their mandatory application, delivering new reporting bases for insurance liabilities (IFRS 4 Phase II), investments (IFRS 9), leases, service revenues and consolidation (IFRS 10).
- On 19 October 2012, the IASB decided they would keep IFRS 9 mandatory on 1 January 2015 and give approximately three years for the implementation of the final IFRS 4 Phase II from its publication. The new effective delivery date is therefore 1 January 2017.
- The effective date for IFRS 10 is 1 January 2013 and revenue and leases are expected in 2015 and 2016.
- The journey ahead is now clearly visible and very bumpy. This is likely to be the major change in financial reporting regulations in the history of the insurance industry: the “waiting game” is no longer a winning strategy.
- Disengaging from a convergence with the US standard setters appeared to accelerate the IASB plans to complete its work to deliver the reforms demanded by the G20 to give stability to global markets
2. Why is it important for Investor Relations?
The opportunity to increase investors’ appetite for insurance stocks and debts demands proactive management.
For the first time in their history insurance companies in the European Union will be measured in capital and profit terms on the same uniform basis after the adoption of Solvency II and IFRS Insurance (with IFRS Insurance we refer to the series of new accounting pronouncements including IFRS 4 Phase II on insurance liabilities and IFRS 9 on investments and derivatives).
- This major regulatory change offers the potential to convey more transparent and consistent information for analysts, investors, rating agencies and regulators.
- The key benefit is more efficient capital markets for insurers’ stocks and debts and lower cost of capital.
The transition to Solvency II overlaps the adoption of IFRS Insurance.
This regulatory process appears more complex than previous reforms (such as Sarbanes-Oxley) and we believe a pro-active management of the communication of its impacts with the relevant stakeholders will generate material benefit to insurers:
- IFRS profit will be radically affected by the new requirements. The novelties need to be linked to past KPIs and the known strategy would have to be presented afresh using the new Solvency II and IFRS Insurance metrics Investors communication is most effective when it reflects a consistent message/language from all levels of the company:
- in the external and internal financial information as well as in how executive performance is rewarded Given the efforts made to date to prepare for Solvency II, insurers should not wait the drive to IFRS adoption to manage this transition. Instead, they should act now to enable management to guide the market ahead of the adoption of Solvency II and IFRS Insurance.
The main risk to be mitigated is the formulation of market consensus that would not be met by the actual level of profit and capital when presented under the new bases.
3. Why is IFRS important to rating agencies?
Clearer financial communication is crucial for insurers now more than ever.
It's part of corporate responsibility.
- Insurers have responsibilities to their stakeholders to provide transparent and clear financial information to explain their performance and capital position. This is critically important when the frameworks regulating both dimensions are undergoing a radical transformation.
- Insurers need to consider Rating Agencies in their communication to the market, as they are influential in the financial markets.
- Insurers should plan to engage in a dialogue with their key agencies to guide them on how to adapt their financial models during the transition. This is crucial to ensure the insurance company’s strategy and performance is understood under the new metrics and comparability with past performance and the insurer’s peer group aided.
It provides a competitive advantage.
- Since the financial crisis most insurance stakeholders are demanding more and more insightful financial information.
- IFRS Insurance will impose more transparency and deliver uniform profit reporting for the first time in the history of the European insurance sector.
- The insurer who proactively manages the overlapping transition of Solvency II and IFRS Insurance could differentiate from its peer group improving the resilience of its stock price and its capacity to raise debt at competitive rates.