In view of the upcoming changes in the European insurance market, namely the entry into force of the EU Directive Solvency II and the second phase of IFRS 4, the requirements to solvency and transparency of financial statements of the insurance companies, including Ukrainian, will become more demanding and higher. Although, IFRS on insurance activities are still at the development stage, Ukrainian insurance companies need to start preparing today for a change in the internal information systems to meet the new requirements of IFRS and Solvency II.
Based on the above mentioned, the audit firm Mazars Ukraine together with the research center “Euclid” gathered representatives of the leading international and local insurance companies and brokers at the business breakfast entitled “European standards to the regulation of the insurance market. What should insurance companies expect?” in order discuss practical issues of implementation of these changes in Ukraine. Yevgeniya Kopystyanska, Head of Audit Department, and Vitaliy Radkevich, Audit Manager from Mazars Ukraine told about major provisions of the IFRS 4 Phase II and Solvency II Directive and their implications in Ukraine.
In March 2014, the European Parliament adopted the Directive Solvency II for estimating the capital adequacy of the insurance company. The Directive provides the three-tier system of insurers’ solvency evaluation, including the requirements for estimating the capital adequacy due to risks (quantitative requirements), the requirements for risk control (quality requirements), disclosure and transparency.
Solvency II requirements will take effect starting 2016, which at first sight, gives the insurance companies enough time to prepare themselves for the innovation. However, the Mazars experts paid the insurers’ attention to the fact that in order to submit the report according to the new rules in 2016, the companies would have to re-evaluate their balance sheets for the year ended 2015 (which are to be submitted in accordance with the current Solvency I requirements) according to Solvency II.
The European Financial Reporting Standard related to insurance market IFRS 4 has been developed over 15 years already. The first discussions about its implementation began in 1997. The IFRS 4 Phase I Insurance Agreement entered into force in 2005. In 2013, the Phase II draft was first published, while its final version is expected to be released in the second half of 2014. It is expected that the IFRS 4 Standard Phase II will come into effect before 1 January 2018.In practice, when IFRS 4 Phase II and Solvency II come into force, it will force significant changes in the obligations measuring (current market value / balance sheet value) and information systems of insurance companies. Accordingly, it will require some time, resources, and money. Therefore, the companies should start the process of restructuring their systems according to the new standards already today. As the requirements of Solvency II and IFRS 4 Phase II have a lot in common, the companies could implement the new standards simultaneously.
“Insurers will have to develop solutions to both tasks of the IFRS 4 and Directive Solvency II implementation at the same time. Given the right approach, the insurance companies can simultaneously streamline the financial statements for external users, the reports submitted to regulators, as well as management reporting. Doing that simultaneously, the insurance companies have a good opportunity to save time and resources and eventually implement IFRS into their capital management programs,” stated Yevgeniya Kopystyanska, Head of Mazars Audit Department.
During the event, the participants had an opportunity to ask questions and have a discussion among colleagues in a relaxed atmosphere having a cup of coffee.
This was the first in the series of events, launched by Mazars Ukraine, during which our experts will cover the most pressing issues and hot topics related to audit procedures, specifics of IFRS, changes and novelties in the tax legislation of Ukraine, as well as nuances of the international and Ukrainian accounting standards.