Comparison of Stakeholder Perspectives on Current Regulatory and Reporting Reforms

• Author: Alexandra Zemp,Joël Wagner
• Published date: 01 September 2012
• Date: 01 September 2012
• DOI: http://doi.org/10.1111/j.1540-6296.2012.01218.x

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2012, Vol.15, No. 2, 225-254

DOI: 10.1111/j.1540-6296.2012.01218.x

COMPARISON OF STAKEHOLDER PERSPECTIVES ON

CURRENT REGULATORY AND REPORTING REFORMS

Jo¨

el Wagner

Alexandra Zemp

ABSTRACT

In the European insurance industry, regulatory and reporting frameworks are

currently subject to far-reaching reforms.We focus on four of these frameworks,

namely the Solvency II framework, insurance guaranty systems, the proposed

IFRS 4 Phase II international accounting standards, and Market Consistent Em-

bedded Value reporting. We present these frameworks, analyze them from the

insurance company’s management, investors, and policyholder perspectives,

and compare them. Our analysis implies that the four frameworks need to be

considered jointly,due to various interrelations and interactions. We argue that

a coordinated introduction will be necessary to ensure that the regulatory bur-

den is reduced and synergies can be utilized in the event of all four frameworks

being implemented as planned. Furthermore, we analyze the challenges of a

holistic, comprehensive approach to insurance reporting and regulation and its

implementation in order to achieve the goals set by the frameworks.

INTRODUCTION

Currently, regulatory and reporting frameworks in the European insurance industry

are undergoing various far-reaching reforms. In general, solvency measurement and

solvency requirements appear to be the main areas of focus, for instance with the

European Solvency II framework. However, in addition to common capital standards,

the European Union (EU) currently faces the need to harmonize other regulatory

frameworks to a certain degree, amongst them, for example, the adequacy of existing

guaranty schemes, see European Commission (2010b). The Committee of European

Insurance and Occupational Pensions Supervisors (CEIOPS) (2009) specifies further

elements that need to be reconsidered as a consequence of the financial crisis, namely

information to policyholders and common reporting formats.

In this article, we present four key European insurance-related regulatory and reporting

frameworks, which are currently subject to important reforms. We focus on the Solvency

II framework, insurance guaranty systems, the proposed IFRS 4 Phase II international

Jo¨

el Wagner and Alexandra Zemp are with the Institute of Insurance Economics, University

of St. Gallen, Kirchlistrasse 2, CH-9010 St. Gallen. Jo¨

el Wagner can be reached by e-mail at

joel.wagner@unisg.ch. This article was subject to double-blind peer review.

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accounting standards, and Market Consistent Embedded Value (MCEV) reporting. We

analyze and contrast these four frameworks from different perspectives. In our compar-

ison we consider the views of the insurance company’s management, the policyholders,

and the investors, which represent the major parties affected. Even if the goals and core

structure of the systems considered are mostly defined, the frameworks are not finalized

yet. In this work we build upon and specify the most current draft status of the ongoing

elaboration.1

The first framework considered, Solvency II, is expected to enter in force by 2014 after

a phasing-in period in 2013 (European Union, 2009; European Commission, 2011a).

Solvency II adopts an enterprise risk management approach and takes into account

the risk profile of the entire insurance company. Hereby it has a much broader scope

than the Solvency I framework, which was introduced in 2004. The new framework

consists of three pillars. The first pillar prescribes capital requirements, the second pillar

defines qualitative requirements, and the third pillar focuses on supervisory reporting

and public disclosure.

Second, insurance guaranty systems provide last-resort protection to policyholders in

the event of the default of an insurance company (see, e.g., Oxera, 2007). In a White

Paper on insurance guaranty systems, the European Commission (2010b) proposes the

introduction of a directive to ensure that all member states of the European Union

have in place an insurance guaranty system meeting certain minimum requirements.

Currently, only 12 out of the 30 EU-EEA countries have insurance guaranty schemes in

place (European Commission, 2010b).

The third framework, IFRS 4 Phase II, is a planned set of reporting standards defining

how to recognize, measure, and disclose insurance contracts (IASB, 2010b). These new

reporting standards take a market value-based or risk-based approach to insurance

companies. We focus here on the exposure draft published in July 2010. While the

effective date of the introduction is still to be confirmed, a re-exposuredraft is expected in

2012. The new standards are based on IFRS 4 Insurance Contracts, which was introduced

in 2004.

Fourth, the MCEV Principles (CFO Forum, 2009b) were published in June 2008 and

are already in use by some companies. The new principles were expected to be the

only recognized format of embedded value reporting from December 31, 2011 onward;

however, reflecting the ongoing development of disclosure requirements under IFRS

and Solvency II, the CFO Forum withdrew this intention in April 2011. The new MCEV

principles are intended to further harmonize embedded value reporting in Europe and

are based on the previously introduced European Embedded Value (EEV) Principles

(CFO Forum, 2004).

1Status updates for the systems considered can be found through the following online

portals. Solvency II: European Insurance and Occupationals Pensions Authority (EIOPA)

at https://eiopa.europa.eu/activities/insurance/ solvency-ii/index.html; insurance guaranty

systems: European Commission at http://ec.europa.eu/internal_market/ insurance/

guarantee_en.htm; IFRS 4 Phase II: International Accounting Standards Board (IASB)

at http://www.ifrs. org/Current+Projects/IASB+Projects/Insurance+Contracts/Insurance+

Contracts.htm; MCEV: CFO Forum at http:// www.cfoforum.nl/embedded_value.html.