IFRS 17 Impact on Insurance M&A Integration

Navigating the complexities of integrating insurance M&A transactions in a post-IFRS 17 landscape requires a deep understanding of the changes brought about by the new accounting standard and its implications for financial reporting. With IFRS 17 now mandatory for entities issuing insurance contracts under IFRS reporting requirements, mergers and acquisitions of insurance entities previously operating under non-IFRS 17 bases demand careful consideration and thorough integration efforts to ensure a smooth transition.

Harmonizing reporting-basis differences entails aligning accounting policies, actuarial methodologies, assumptions, and disclosure requirements to ensure consistent and transparent financial reporting post-integration. This is essential to present unified financial information to stakeholders. Transitioning a balance sheet from a non-IFRS 17 to an IFRS 17 basis can be approached in two ways.

European insurance companies transitioning to IFRS 17 may opt for a two-step approach leveraging the Solvency II balance sheet. The first step involves aligning the balance sheet with Solvency II requirements, followed by further adjustments using Solvency II methodologies to align valuations of insurance contracts, risk adjustments, and financial reporting with IFRS 17 guidelines. Adjustments involve reclassifying non-IFRS 17 results to an SII basis and further adjusting SII results to obtain certain IFRS 17 metrics, considering complexities such as modifying actuarial models and data for granular CSM engine calculations and converting risk margins.

On the other hand, directly transitioning from a non-IFRS 17 balance sheet to an IFRS 17 one requires extensive adjustments. This includes developing IFRS 17 methodologies, reassessing the valuation of insurance contracts, defining and adapting actuarial methodologies, and adjusting financial reporting practices accordingly. This approach involves more complexity in terms of actuarial model modifications and first-time assumption setting for the IFRS 17 risk adjustment. Building a robust CSM engine necessitates a complex data and model architecture to cover aspects like gross and reinsurance profitability assessments.

In both approaches, there are critical elements to consider regarding communication and integration. Deal structuring and assumption setting play a pivotal role, especially in valuing insurance liabilities and risk assumptions. Consistent communication with stakeholders is crucial when reporting the acquisition balance sheet and highlighting the profit generated from the acquisition.

In conclusion, transitioning to IFRS 17 in insurance M&A transactions requires a meticulous approach to ensure the integration is seamless and transparent. By understanding the complexities involved in aligning reporting frameworks, valuations, and financial reporting practices, insurance entities can navigate the challenges posed by the new accounting standard and communicate effectively with stakeholders throughout the transition process.