Fundamental differences with Solvency 2 | KPMG | CY

Fundamental differences with Solvency 2

Fundamental differences with Solvency 2

Systems and processes will require additional development under IFRS 4 Phase 2. Even for those who recently implemented Solvency ll.

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The impact of IFRS 4 Phase 2 on an insurer’s operating model will depend a number of factors, such as its current reporting basis; the complexity and maturity of its business; whether it has recently undergone a major finance transformation; or the extent to which it has complex legacy systems.

In Europe, insurers have made significant investments in new systems to comply with Solvency II, and many might expect that their newly-developed systems and processes will require little additional development in order to meet the requirements of IFRS 4 Phase 2. However, there are some fundamental differences that insurers who have implemented Solvency ll must be aware of.

Differences insurers from Solvency 2 must be aware of

  • The requirement to calculate and maintain a contractual service margin (CSM), except where the premium allocation approach (PAA) is used.
  • The need to allocate the risk adjustment (RA) at a more granular level.
  • The challenges of calculating the insurance contract revenue measure.
  • The need to analyse movements in fulfilment cash flows between those that will be presented in profit or loss, in other comprehensive income (OCI), or off-set against the CSM.

For those companies that have not had to implement Solvency II, IFRS 4 Phase 2 will typically pose an even greater implementation challenge. 

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