Solvency II and IFRS 17 Integration: An Opportunity That Cannot be Missed

These insights are by Padraic Clarke and Karl Murray, Client Partner and Technical Director, 4most (Ireland)

Solvency II and IFRS 17 are key pillars of modern insurance industry regulation, shaping prudential and financial reporting requirements for insurance companies, while also attracting interest from shareholders and policyholders. The former addresses regulatory capital and solvency requirements with the overarching aim of ensuring policyholder protection, whereas the latter intends to improve financial reporting and transparency around insurance contracts. Nonetheless, both are underpinned by overlapping principles and methodologies.

And though both sets of regulation came into effect some time ago – following substantial day one compliance efforts by industry players – many insurers have struggled to integrate reporting processes, in many cases duplicating efforts and using resources inefficiently. 4most recently conducted a survey to assess the impact of IFRS 17 on Irish insurers that are obligated to report under its standards. A resounding 81% indicated that the additional IFRS 17 reporting has had a ‘significant’ impact on the challenge of meeting working day timetables, indicating a low level of harmonisation across reporting bases.

By developing a more aligned approach to compliance, insurers can unlock efficiencies, enhance data consistency and reduce reporting complexities. In this article, we explore the common overlaps between these frameworks, highlighting how a coordinated strategy can streamline compliance, optimise operations and ensure consistent reporting across regulatory and financial metrics.

An opportunity beckons

While Solvency II and IFRS 17 differ in their objectives, the overlap in principles and frameworks is notable. Both adopt a risk- and principles-based approach, use economic valuation methods for liabilities and account for the effects of interest rate fluctuations on balance sheets. These shared elements allow insurers to benefit from operational efficiencies by better aligning data, models, processes and technologies across both frameworks. Leveraging similarities between the two can simplify reporting and allow insurers to effectively navigate the challenges in front of them as they develop new products or break into new markets.

Quick wins

Insurers can achieve immediate benefits by aligning select elements of their reporting processes, eliminating the need for extensive and resource-intensive changes. Actions that can be undertaken include:

· Synchronising reporting timelines for Solvency II and IFRS 17 without overhauling entire reporting processes.

· Aligning the cashflow projection models used for both frameworks.

· Harmonising the discount rates used for both frameworks.

· Establishing a centralised data repository, which could be achieved by some insurers in a relatively short period of time depending on the scale and complexity of their business. A

central data warehouse ensures consistent, high-quality data for reporting, while a cloud-based infrastructure allows insurers to scale their data management capabilities.

· Standardising the assumptions used to calculate the risk adjustment and the risk margin.

· Implementing basic automation tools to reconcile data between Solvency II and IFRS 17 reports.

· Conducting scenario testing for both frameworks using the same assumptions and risk scenarios.

Strategic mindset

Insurers need to foster a culture of collaboration and shared responsibility across departments to ensure that data, assumptions and methodologies are consistent. This may require organisational restructuring, new governance processes or investment in change management and training initiatives.

A cross-functional approach involving actuarial, finance, risk, and IT teams is critical for successful, large-scale integration projects. Actuaries must align their models and assumptions with those used by finance and risk management teams. Meanwhile, the IT team must provide the infrastructure for seamless data sharing to ensure the wider team can meet the demands of both frameworks efficiently. Ultimately, success hinges on staff training, a considered change management strategy and leadership support to align integration efforts with strategic goals.

Automated data collection and reconciliation is another key component of success. Automation can also be used by insurers to generate reports for the regulatory demands of Solvency II and reporting of IFRS 17 simultaneously. Notably, aligned processes can help to harmonise Solvency II Pillar 3 disclosures and IFRS financial statement notes, eliminating the need for multiple reporting efforts.

Insurers can leverage advanced technologies such as data analytics, AI and machine learning. Both frameworks require insurers to process vast volumes of data and tackling this challenge without the support of cutting-edge technology would be remiss.

Many insurers also currently rely on legacy systems for their Solvency II reporting, which may not be compatible with the requirements under IFRS 17. IFRS 17 demands more advanced data processing capabilities, including the ability to handle detailed contract-level data. Insurers in this position must consider upgrading their IT systems or investing in new, integrated solutions that can support both frameworks’ reporting requirements.

Integrate for future success

Integration makes future scalability easier. As insurers grow, having a unified reporting system that supports both Solvency II and IFRS 17 will reduce the complexity and cost of scaling operations in different jurisdictions or product lines.

By integrating data and systems, insurers can significantly reduce the time spent on reporting, cut down manual reconciliations and improve the accuracy of both sets of reporting. They can also achieve greater consistency in risk management and financial performance assessments, leading to better decision-making.

By leveraging technology, insurers can reduce reporting errors, shorten reporting cycles and enhance their ability to meet reporting deadlines. The use of advanced analytics provides deeper insights into financial performance and risk exposure, further enhancing strategic decision-making.

Whether following a phased approach or undertaking a large-scale transformation project, insurers can benefit from reviewing their existing Solvency II and IFRS 17 approaches, with many already reaping the benefits.