IFRS Phase II and Solvency II: Key Issues, Current Debates

The paper discusses key issues and reflects the current debates around two important regulatory projects: Solvency II and International Financial Reporting Standards (IFRS) Phase II. The Solvency II project is based on an economic balance sheet and proposes an economic valuation of insurance liabilities that is very close to the European industry position on assessment of risks and solvency requirements based on how the business is managed. One key element is still under debate: diversification across portfolios. The industry considers that the entity's own diversification must be reflected in the valuation of the insurance liabilities while the Committee of European Insurance and Occupational Pensions Supervisors' has referred to an empty undertaking. IFRS Phase II can appear to be an approach similar to Solvency II, but actually is based on fundamental flaws, excluding future cash flows, and insurers actions, referring to a theoretical market participant efficiency instead of the entity's specific data for expenses, unbundling artificially insurance and financial components, taking into account insurer's own credit standing and adding a service margin to the risk margin. The diverging timetables of IFRS and Solvency II lead to a risk that IFRS and solvency could be non-aligned and increase the danger that IFRS for insurance may be distant from the economics of the business. A consensus within the industry is therefore crucial to facilitate the progress of the international standard for insurance accounting, which would give a true and fair presentation of the economics of the business.The Geneva Papers (2009) 34, 47-55.