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Brexit: why it takes two to tango

Former TA editor Vincent Huck, now editor of Insurance Asset Risk, looks at why Brexit might unleash geopolitical intrigue in Europe’s accounting standard-setting scene – and why IFRS 17 will be an incredible source of opportunity for firms in the coming years.

Will the Brexit ink ever dry up? With so much written about the subject, it is hard to think that something has not been covered. However, it might be the case when it comes to accounting standards. 

In March, Andrew Watchman bade farewell to European Financial Reporting Advisory Group (EFRAG), where he had been CEO and chair of the Technical Expert Group (TEG) for three years. 

In a goodbye LinkedIn post, he did not mince his words: “In some other circumstances I might have stayed on to finish some key projects – not least EFRAG’s work on IFRS 17 – but Brexit has made this impossible.”

Even before Brexit, EFRAG was prone to being a geopolitical battlefield. The IASB is seen – rightly or wrongly – as an Anglo-Saxon body, and while never admitted publicly, some mainland European standard setters have privately been critical of the UK voices within EFRAG, which were thought to be more aligned with the IASB’s interest than the EU’s. 

As the most visible of those UK voices – he wore the CEO’s hat, after all – Watchman is replaced by two Europeans: Chiara del Prete as the new EFRAG TEG chair, and Saskia Slomp as the new EFRAG CEO.

There is now a question mark on the future relationship between the IASB and EFRAG – bearing in mind that the EU is the largest economic zone to have fully adopted and implemented IFRS. However, at the IASB, senior members of the board like to believe that other nations will fill in to provide the “calming voice” the UK once was. 

It is no surprise that, in his Linkedin post, Watchman singled out IFRS 17 on insurance contracts. It is one of the IASB’s most important ongoing projects, and it will be the first major accounting standard that the UK will have to implement in a post-Brexit world – assuming Brexit happens. 

In private conversations, senior officials at the UK Financial Reporting Council (FRC) said this was internally a source of great anxiety. The FRC had been given powers to establish an endorsement body, but now that the watchdog is on the path to being abolished, the question becomes even more pressing – and there is little answer. 

It is likely that the EU and the UK could have a separate endorsement process, an added level of complexity that will not go unnoticed as an opportunity for firms.

IFRS 17 Beyond Brexit
With IFRS 17, the insurance industry is about to be hit by the biggest overhaul of its accounting in decades, and one that has provided – and will continue to provide – a steady source of opportunities for consulting and accounting firms. The standard has been years in the making, and while the IASB has voted to delay its implementation for one year to 1 January 2022, it is likely to be the hot topic of the coming years for insurers. 

IFRS 17 comes on the back of another compliance mammoth, Solvency II, which came into force in January 2016. A European regulation, Solvency II codifies and harmonises EU insurance regulation – primarily around the capital that EU insurers must hold to reduce the risk of insolvency. 

It would seem natural for insurers to look at Solvency II to find answers in their IFRS 17 implementation – both sets of rules look at the same balance sheet, after all – but a number of challenges arise.

First, IFRS 17 is principle-based, while Solvency II is rule-based. This means that, in implementing IFRS 17, insurers will need to make decisions on the number of options available to them, and the ultimate judge will be the auditors – who said accountants and auditors were obsolete? 

Because the original dataset used in both exercises is the same, some in the standard-setting community say it makes sense to look at Solvency II as a starting point, especially from the data-collection side of things; how the data is treated, however, is another matter. 

Some consultancies have argued that they can help their clients “walk” directly from a Solvency II balance sheet to an IFRS 17 one, but standard setters – in private conversations – have been sceptical about how feasible this would be.  

Ironically, outside Europe, IFRS 17 might have the effect that Solvency II had in the EU. With the introduction of IFRS 17 and IFRS 9, an insurer with mismatched assets and liabilities will encounter more balance-sheet volatility. This poses the question as to whether the standards will push insurers to be more risk-adverse and move to close the mismatch. But the effects of Solvency II have already initiated that prudent move among European insurers.

Therefore, the standards will not have a major impact on the business models of European insurers; in other jurisdictions, however, it might well have that effect. 

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