IFRS 4 / IFRS 9 Prestudy Allianz SE

Transcription

1 IFRS 4 / IFRS 9 Prestudy Allianz SE Major challenges and architectural conclusions Dr. Jens Hanker, Executive Vice President, Allianz SE Vaike Metzger, Partner, KPMG SAP Financial Services Forum London, September 9, 2014

2 Agenda 1 IFRS 4 / IFRS 9 challenges 2 Allianz Group pre-study 3 Major gaps identified 4 Conclusions for a future finance architecture 5 Audit perspective: Compliance in the context of IFRS 4 / 9 2

4 IFRS 4 / IFRS 9 challenges New IFRS (International Financial Reporting Standard) accounting regime ahead Current regime Future regime (under discussion) Assets Liabilities Assets Liabilities Financial Instruments IAS 39 (mixed measurement model) Insurance Contracts IFRS 4 Phase I (US GAAP static accounting) Financial Instruments IFRS 9 (mixed measurement) Insurance Contracts Allianz IFRS 4 expected Exposure draft Industry approach The new standards will have significant impact on systems, processes and financials on Group and local entity level and require to run a major implementation project over the next years. 4

5 IFRS 4 / IFRS 9 challenges New requirements from IFRS 4 Phase II for insurance contracts (exposure draft published) Cornerstones of the new insurance contracts accounting model are set Measurement of insurance liabilities using building block approach ( BBA ) incl. prospective cash flows, time value of money, risk adjustment and contractual service margin ( CSM ) Current fulfillment value measurement on the face of the balance sheet Liability changes from discount rate fluctuations which reverse over time can be reported in other comprehensive income ( OCI ) Simplified premium allocation approach ( PAA ) applicable for short-term non-life ( P&C ) business (similar to current unearned premium approach but more complex) while some topics are still under discussion in the IASB Modeling of policyholder participation and shareholders share in performance of underlying items ("mirroring" vs. "building block approach") Presentation of premiums and determination of interest expense for profit & loss (P&L) statement Recognition of all assumption changes (incl. financial) against contractual service margin ( CSM )! Despite similarities to Solvency II, major impact for life insurance accounting and significant changes for P&C accounting expected 5

6 IFRS 4 / IFRS 9 challenges New requirements from IFRS 9 for financial instruments (final standard published July 2014, effective Jan 2018) Classification & Measurement Impairment Debt assets can only be classified as at fair value ( FV ) through other comprehensive income ( FV-OCI ) if certain conditions are met ( simple debt asset and business model test ). Equities can still be classified as FV-OCI but no recycling of OCI through P&L Fair value through profit & loss statement ( FV-P&L ) is the residual category, plus FV-option continue to exist Presumably, classification of more debt assets in FV-OCI & FV-P&L Expected loss model for debt instruments 12 months expected losses recorded at initial recognition ( day one loss ) Lifetime expected loss if credit risk deteriorates significantly New estimation models and processes to be established Hedge Accounting Substantial overhaul of hedge accounting to better reflect risk management More hedge accounting relationships will be possible than in the past Less formal documentation requirements, critical term match sufficient New possibilities for hedge accounting to be explored 6

8 Allianz Group pre-study Allianz complexity through global and product diversity Parallel programs running (e.g. Solvency II) Multiple Lines of Business in more than 70 countries 100+ entities with a number of subgroups Limited standardization of finance architectures Heterogeneous and complex insurance architectures Allianz operates as an international insurer on almost every continent Leading Property and Casualty ( P&C ) insurer globally Top 5 in Life insurance business globally Worldwide leader in credit insurance One of the leading Asset Managers globally 8

9 Allianz Group pre-study Current expectation: IFRS 4 & 9 first application in IFRS 4 Early 2015: IASB plans to issue final IFRS Jan 1, 2018 Earliest effective date IFRS 9 July 2014: IASB issued final IFRS 9 Jan 1, 2018 Announced effective date by the IASB Allianz Pre-study Set-up of program and local projects Conceptual design Realization Test & roll-out Run in parallel - IFRS future regime - IFRS current regime Run IFRS new regime Today Go-live Switch in external reporting 9

10 Allianz Group pre-study Pre-study IFRS4/9 Today Go-live Switch external reporting Pre-study Set-up of program and local projects Conceptual design Realization Test & roll-out Run in parallel - IFRS future regime - IFRS current regime Run IFRS new regime Key activities Interpretation of Exposure Drafts and Industry Approach and analysis of impacts on Allianz operating model Gap-analysis of IFRS 4/9 and development of solution scenarios to close the gaps Involved parties: Various group center (e.g. Accounting, Risk, IT and Service subsidiaries, ) Selected pilot entities (Germany, Switzerland, Benelux, France, Italy, AGCS) Results Basis for further discussions with IASB (International Accounting Standards Board) Identified key projects or possible solution scenarios needed to close the functional and non-functional gaps (e.g. auditability, performance) with effort estimation 10

12 Major gaps identified Functional layers were introduced to identify gaps Reporting Reporting of local operating entities and Group Accounting Financial IFRS accounting for operating entities and Group consolidation Financial instruments (IFRS 9) Valuation of financial instruments according to IFRS 9 standard Actuarial Property & Causality and Life Calculation of values according to IFRS 4 phase II (BBA / PAA) Data collection & integration Provide input data for valuation, management of result data and provision of data for General Ledger Source systems Insurance specific source systems e.g. policy, claims 12

13 Major gaps identified Major gaps within defined functional layers Reporting Implementation of a comparable reporting framework Impact on reporting processes as well as on IT environment Accounting Adjustment versus new Chart of Account and adaption of integration / mapping rules Handling of transition year in General Ledger and consolidation systems Financial instruments Actuarial P&C Implementation of new classification Impairment expected to be major impact Major challenge possible future segmentation for reserving impairment expected to be major impact System changes / new systems required due to requirements like Premiums received instead of premiums due Modeling on an underwriting year basis instead of accident-year OCI effect data preparation, calculation, storage and controls CSM calculation and amortization, if business is not eligible to the simplified premium allocation approach ( PAA ) 13

14 Major gaps identified Major gaps within defined functional layers Actuarial Life To achieve IFRS deadlines streamlined with Solvency II actuarial models often need to be fundamentally rebuilt to reduce running time Process, model, and system changes anticipated due to requirements like Options & guarantees supposed to require actuarial model revision OCI concept might require to split participating / non-participating business Several annual validation tasks might lead to high reconciliation efforts Parallel runs during transition phase expected to cause high efforts Data collection & integration Major effort for data extraction process expected when multiple feeder systems and / or manual adjustments Derivation and storage of assumptions should be standardized in a compliant environment (-> audit trail and for analysis purposes). Source systems Number and degree of standardization of feeder systems determines if minimal adjustments are feasible If current segmentation will not be sufficient for future IFRS purposes this might lead to modifications of the granularity of data. 14

16 Conclusions for a future finance architecture Finance architecture design principles New technical accounting requires industrial strength Finance architecture to support multiple regulations Re-use of existing solutions Reliability & Robustness, Performance Auditability & Traceability Ability to replicate technical model calculations Historization & Archiving of all static, model and event data Not only support IFRS 4 Phase II, but also Solvency II and Local GAAP(s) Central source of truth to feed various Group systems Re-use MVBS closing Re-use General Ledger Re-use Actuarial modeling Re-use ETL (e.g. built for Solvency II) Share of new functionality Clearly defined share of functionality in accounting vs. actuarial systems Build / deploy Group solution where possible and feasible 16

17 Conclusions for a future finance architecture Application Target Finance Architecture Local OE - Systems Group - Systems General Ledger Consolidation Actuarial support MoSes / ResQ Cash Flow tool Risk Agility Investment Data Warehouse Solvency II (QRT) reporting tool Risk systems Technical sub-ledger Business Warehouse Databus (Data integration between entities and Group and within Group systems) Hosted within same data center 17

18 Conclusions for a future finance architecture Functional Target Finance Architecture Operational feeder systems Policy Administration Sub ledger (Payroll, etc.) Collection & Disbursements Claims Reinsurance BI/Analytics Assets Impairment Expected Loss Calculation ETL Extract, Transform & Load Staging Local target finance architecture Technical Sub-Ledger Financial Reporting & Analytics Processing Actuarial Modeling Life & Health P&C Financial Data Management Posting General Ledger (GL) Data bus Consolidation and other data feeds Group finance systems Group GL & BW Tech DB Risk Systems Abacus (QRT) Central investment services Securities Master Impairment Expected Loss Calc. Stage Allocation (Risk) Market Data Loss Probability Given of Default Default IDW Stage Allocation 18

20 Audit perspective: Compliance in the context of IFRS 4 / 9 Vaike Metzger, Partner, KPMG SAP Financial Services Forum London, September 9, 2014

21 Audit perspective: Compliance in the context of IFRS 4 / 9 Compliance will be a significant effort IFRS 4 / 9 are accounting standards that affect operating models across processes, data and systems These operating models must meet certain compliance standards What are the key areas of the operating model that are affected by IFRS 4 / 9? Processes: Cooperation / work share between accounting and actuarial department (esp. internal control system (ICS)) Data: Common data view within different systems and departments (data provision, data management, data quality, alignment with Solvency II) Systems: Integration of e.g. End User Computing (E2E coverage of processes and ICS with IT-systems) 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 21

22 Audit perspective: Compliance in the context of IFRS 4 / 9 Compliance requirements IT perspective Statutory Requirements Statutory regulations and comparable regulations (e.g. General Accepted Accounting and Compliance Standards for IT (DE: HGB, IDW FAIT1). Tax Law Requirements Regulations derived from or that are primary sources for tax assessment and collection (e.g. Federal General Tax Code, DE: AO, GoBS, GDPdU). Regulatory and other Requirements Regulations being specific to insurance companies (e.g. Solvency II, DE: MA-Risk (VA)). Examples General principles of accounting, e.g. Completeness, accuracy, Journal of booking entries Archiving Internal control system, e.g. Authorization concept, segregation of duties, approvals Historisation and versioning General IT compliance, e.g. access management, change management, IT security etc. Additional regulations for out-/ sourcing (e.g. data protection) Data Governance Data Quality (accurate, complete, appropriate) 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 22

23 Audit perspective: Compliance in the context of IFRS 4 / 9 ISEA 3402 Benefits of a centralized audit and reporting Increasing external requests on an Insurance company`s IT control framework requires efficient and effective reporting... Company, Group Increasing legal, regulatory and other requirements Ongoing centralisation of processes, systems & data Shared Services / Outsourcing Efficient and effective Audit ISAE 3402 Internationally accepted standards (e.g. ISAE 3402,SOC) Existing Internal Control System (ICS) as a basis Agreed audit scope, incl. verification with local entities Efficient and effective Audit Company, local entity Increasing legal, regulatory and other requirements Ongoing centralisation of processes, systems & data Shared Services / Outsourcing External and internal Stakeholder Shareholder Audit Firms, regulator Other business partner Enables transparency of existing ICS to external stakeholders Benefits of a central audit report Less effort by satisfying stakeholders' requirements and ad-hoc-requests Time consuming and increasing requests 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 23

24 Audit perspective: Compliance in the context of IFRS 4 / 9 Requirements and challenges for IFRS 4 /9 (extract) Areas of special attention within finance architecture Enhancement of existing business processes and control framework (e.g. integration of impairment calculation) Assurance of audit trail and traceability between accounting and actuarial systems, systems are currently often not integrated or end user computing in place (e.g. link model assumptions and result data, archiving) Ensure data availability for future reporting requirements and identification of gaps in data history, e.g. to create claims triangles based on underwriting year Analyze existing manual work activities processes and quality of data reconciliations regarding additional requirements High workload due to multi-reporting requirements, closing deadlines have to be considered 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 24

25 Audit perspective: Compliance in the context of IFRS 4 / 9 Consequences of IFRS 4 / 9 for the future Finance Architecture Consequences Industrialization of processes and systems Demand for integrated solutions, that support the full process chain Usage of compliance related functionalities within standard software is expected to be more efficient than a green field approach for an self developed solution. Usage of company wide solutions will enforce common valuation and compliance principles within the company and therefore facilitate reviews Consider compliance aspects at an early stage e.g. IFRS 4 pre-studies. IFRS 9 final standard was completed and published in July 2014 activities for design of solutions and discussions with auditors can start 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 25

26 Thanks!

27 KPMG and Allianz Group have a process in place to comply with the pre-approval provisions of the US Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). The Allianz Group Audit Committee has established pre-approval policies and procedures, and has preapproved audit and non-audit services of KPMG in a detailed Positive List. The other non-audit service described in this engagement letter is contained within the scope of the service category (SIN) "Advisory Actuarial" on the Audit Committee Positive List KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).