Insurers face a significant challenge ensuring they do not introduce artificial noise or volatility into their financial reporting under the incoming accounting standard IFRS 17.
31 JULY 2018 | CHRIS SEEKINGS
That is the message from an annual insurance summit hosted by Moody's Analytics, with panellists warning that constructing new discount rates under IFRS 17 could create "accounting mismatches".
The regulation requires insurers to use fair value and market-consistent approaches for liability valuations, but it is thought firms may struggle to be consistent across their whole business.
"There is likely to be significant scope for accounting mismatches arising from the varied treatment of different aspects of their business," Moody's Analytics senior director of research, Nick Jessop, said.
"Careful consideration has to be made to constructing discount rates for insurance contracts to ensure that the net finance results clearly and exclusively reflect changes in economic conditions."
Following a recent assessment of yield curve construction methods, Jessop recommended that insurers think carefully about estimates of credit risks and illiquidity.
"Proliferation of yield curves, reusability of analytics produced in each step of the calculation, data availability, suitability, and ease of automation considerations are also important," he added.
The summit revealed that more companies are now looking to how their Solvency II infrastructure can be used for business projection and optimisation, moving beyond compliance.
"It is about looking at how insurers can maximise the investments that they made to deal with Solvency II for financial decision-making apparatus to run business more effectively," panel moderator, Colin Holmes, said.
It was also found that low interest rates continue to drive boardroom discussion, and that a growing number of firms are looking to better understand the dynamics of value creation.
Moody's Analytics senior director of product development, Brian Robinson, said insurers must understand the impact of macro-type events on business, from political uncertainty to recessions.
"Assessing the impact of each scenario allows management to develop and test forward-looking action plans that can be implemented in response to particular events," he added.
Other key topics discussed at the summit included the importance of data management and "breaking down silos" in organisations by bringing risk, actuarial and finance together.
You can read more about the summit and the key themes affecting insurers here.