International Financial Reporting Standards Offer Insurers Opportunities for Operational Synergies

The implementation of IFRS could result in cost-saving synergies in data, metrics and modeling. But up-front investments in data, systems and human resources will be required to realize those synergies.

Understanding IFRS and its business implications is a competitive imperative for all U.S. companies. The final requirements of IFRS for insurers are still unknown as the standard-setters debate the accounting model. For life insurers the model will likely require more-dynamic accounting and disclosure of sensitivities, including projections of future cash flows and modeling of multiple scenarios that will result in significant computational needs. Regardless of the model ultimately selected, the data requirements and supporting systems will change.

Many hope that the new IFRS principles will better align the model used for external reporting with the economic frameworks used for management reporting and potentially regulatory purposes, including Market Consistent Embedded Value and European Solvency II requirements. American regulators are also reconsidering the models used for capital adequacy. Common frameworks could ultimately result in cost-saving synergies in data, metrics and modeling. Up-front investments in data, systems and human resources will be required to realize those synergies. IT departments also will likely have to upgrade systems, standardize data elements and/or establish data warehouses to store and reconcile information, and build shared service centers to support common requirements across subsidiaries. Formal internal controls must also be established over new supporting technology as well as over economic capital systems, including model validation routines now in their infancy.

The benefits from these efforts could include closer alignment among the risk, finance and actuarial functions; enhanced efficiency; and improved projections and modeling. This change will also provide the opportunity for companies to better embed enterprise risk management into the governance, strategy and business operations, facilitated by new technology platforms.