Vendor 4.0: How reinsurance and tax capabilities are stacking up across IFRS 17 solutions
20 July 2020
Last month, we evaluated over 15 IFRS 17 vendors and shared our high level findings. This month, we’re back to explore two challenging areas: treatment for reinsurance and tax.
Treatment for reinsurance
The treatment of reinsurance held under IFRS 17 is complex, both conceptually and practically. Until the final standard was published recently, there was uncertainty about the final IASB requirements. This has meant it hasn’t had enough focus in insurers’ implementation plans.
It is a high risk area that companies now need to accelerate since there are several operational challenges across systems and data. Examples of operational challenges include:
- Unit of account mapping between the reinsurance contracts held and the underlying contracts, including single reinsurance contracts mapped to multiple underlying units of account.
- Valuation methods may differ where the reinsurance is under the general model and the underlying contract under the premium allocation approach or variable fee approach.
- Functionality for multiple valuations of intercompany reinsurance, allowing for stand alone reporting on a group basis with a mechanism to allow for consolidation. Multi-GAAP valuations may be needed for local reporting.
- The subsequent valuation of the reinsurance contracts’ contractual service margin ('CSM') is linked to the underlying contracts reinsured. The functionality of the underlying measurement will need to allow for all data points needed for reinsurance CSM and its run off.
- Valuation of reinsurance contracts will need to consider the estimates of cash flows from the underlying contracts, which may need to include an estimate of future new business on those contracts.
Unsurprisingly, reinsurance needs to be a high priority in consideration of selection, configuration, and implementation of an appropriate vendor solution to ensure that it addresses the clients complex requirements and specific reinsurance arrangements. In Vendor 4.0 whilst no solution currently addresses all of the complex reinsurance measurements capabilities, all vendors are addressing these gaps, front and centre in their development roadmap.
IFRS 17 is likely to have a significant impact on tax. Several jurisdictions (including the UK) allow tax to be calculated using the entitee’s IFRS accounts. In these territories, the transitional adjustment and any changes to the profit profile are likely to directly impact the cash tax position. As the transitional adjustment is likely to be material, tax authorities are considering implementing new tax law to spread the day one impact of the IFRS17 introduction and to have a layered interaction between the day one impact, the transitional rules, and the tax rules relating to loss offset.
There will be an impact on the tax position of the IFRS financial statements both at a group and entity level. This is likely to be based on the transitional amount and may have knock on effects on the solvency capital calculations.
Tax has a number of interactions with other systems and processes in finance and needs to be considered as part of any finance systems change or transformation programme, with VAT and Insurance Premium Tax calculations most likely to be impacted.
Vendors take different approaches to tax. Some include tax functionality in their solutions, whilst others expect this to be performed outside of the core system. Understanding the tax data points and system dependencies is important as they are likely to be impacted and will need to be updated to maintain or improve compliance/reporting processes.
To understand what these challenges mean to you and your business, as well as to discuss the IFRS 17 vendor landscape in more detail, reach out to PwC today.