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NEXONTIS Insurance Analyzer Solutions for SOLVENCY 2 and IFRS 4
Andreas Fisch June 13, 2012
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Executive Summary
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Regulatory Requirements
Solvency II IFRS 9 IFRS 4 Insurer Assets Liabilites Balance Sheet Solvency II: Determination of needed risk capital and comparison with eligible own funds IFRS4 : Financial evaluation of insurance policies at fair value (best estimates) IFRS : Financial evaluation of financial assets at fair value => These 3 regulatory requirements need the same basic information from the complete company
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What the auditors say The insurance industry will have many challenges regarding financial accounting in the next years Activity 2012 2013 2014 2015 2016 IFRS 4 Insurance Policies – Phase II New IFRS-Standard for the accounting of Insurance policies IFRS 9 Financial Instruments New IFRS-Standard for the evaluation of financial instruments Others IFRS, e.g. 10, 11, 12, … Solvency regulations for the equity captial provisions Solvency II US-Tax-Reporting of foreign financial institutions FATCA Others, e.g. E-Tax-Reporting, FinRep / CoRep ► Challenges for the CxO‘s Business Challenges CFO Change of the financial reporting / communication Impacts on balance sheet and P&L statement; portfolio structure Integration in Finance Transformation initiatives Additional alignment efforts Moving Target – IFRS 4 standard not finally defined Overall (CFO | CRO & Actuairs) Re-use of existing models / calculations Limited experiences and capacities Project related challenges CIO Limited development capacities, short timeframe and massive inter-dependencies Risk of losses in synergy by implementing special solutions Overall (CFO | CRO | CxO’s) Costs and Budgets – Business Plan Lack of internal resources Lack of qualified external consulting Text blocks – Influencing chevrons Challenges for the Insurance Industry
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+ No changes in the deadlines for finanical reporting
What the auditors say Further challenges are the short deadlines for quarterly/yearly closing in parallel to increasing IFRS requirements + Current average time consumption Upcoming addition requirements Increased regulatory obligation have to be realised Additional calculation during the closing activities Processing of additional information and auditable archiving Bigger alignment efforts Increased requirements to the business departments up to daily rough balance / P&L reports Derived requirements and risks: Discrepancy between internal and external reporting Intrinsic risk through further Excel spreadsheets Focus on the completion of reporting obligations instead of consulting of the business departments in financial questions Quarterly closing – Average time until publication (days) No changes in the deadlines for finanical reporting Securization of existing investments for fast close processes Challenges for the Insurance Industry
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Current unbiased probability weighted estimates of future cash flow
What the auditors say The new IFRS-Standard for Insurance Policies will heavy impact the current accounting of Insurers through the fair-value-approach ► Modular concept Main Changes Future oriented value determination - Fair-Value approach instead of orientation in the past Structural changes in the balance and P&L P&L will contain future margins, deviations and estimations Current key figures not (fully) recognisable in the P&L Higher result deviations Asset / Liability mismatch can only be reduced by simultaneous implementation of IFRS 4 and IFRS 9 Transition phase not finally defined (e.g. margins only on exitising policies) Extended information in annexes (e.g. used methodes, estimation approaches, alignments, analysis of changes, risk information etc.) Residual margin Risk adjustment Time value of money Current unbiased probability weighted estimates of future cash flow New Reporting based on Building blocks : Best-Estimate Liability (BEL): unbiased, probability weighted average of future cash-flows, assuming that the insurer can fulfill the policy Time value of money: capital value of cash flows Risk Adjustment: as reserve for uncertainty regarding the amount and the moment of future cash flows Residual Margin: which e.g. corresponds to the expected benefit for the whole duration of the policy Challenges for the Insurance Industry
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What the auditors say IFRS 4 requires the evaluation of insurance policies based on discounted cash flows and will change the liabilities within the insurance balance sheet completely ► Requirements from IFRS 4 insurance policies Implication on financial architecture Totally changed reporting on insurance liabilities e.g. Assignment of policies to Portfolios (e.g. in the policy systems) Calculation of the expected cash flow based on premium, benefits and direct costs Discounting / Calculation of the actual value of the Cash flow Calculation of the risik margin for uncertainties in the estmations Calculation of the residual margin to simulate the expected benefits of the portfolio and their allocation to the periode of coverage Creation of a new chart of accounts and new IFRS accounting rules Ensure the tracabilitiy for a seamless financial audit Analysis and posting of To-Be and As-Is difference and of estimate adaptations Reduction of incongruity of Assets and Liabilities Currently no guidelines for the transition regulations for new reporting Most of Insurers will realise a comparative calculation – at least for internal reason (even if not requested) For in-force policies the residual margin will also be needed Implication: high Consolidation Reporting Analytical layer Finance Result Data / DWH General Ledger Methodenschicht MCEV Solv.II IFRS Mgmt. ... Source Data Layer Market data Policies / Benefit MD Middleware / ETL Source systems Policy Benefit Assets ... Challenges for the Insurance Industry
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Architectural principles
Reporting Results Calculation tools Collection of the source data Operational Systems
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Typical insurance company system landscape using IFRA
General Ledger Pillar 3 / Reconciliation® (based on SAP BW / BO ®) 11 12 Insurance Analyzer & Bank Analyzer solutions based on SAP IFRA Actuarial Systems 9 10 IA&BA deal with all accounting, valuation and reporting requirements Non-SAP or SAP based operational systems CRM Account Origination Policy / Reinsurance Collections & Disbursements for Insurance 6 Financial Asset Management Commissions Management 1 3 5 Deposit Management Claims Management 4 Loans Management Contract Accounting for Banks 7 8 Business Partner 2 Operational Systems can concentrate on their core business Example of data flow sequence FS-APPL = IFRA = Banking Services 1
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What SAP and NEXONTIS say about regulatory requirements
„Our offer is to use Insurance Analyzer and Bank Analyzer based on SAP Integrated Finance and Risk Architecture (IFRA)!“ 150+ customers have already choosen IFRA based strategic solutions, e.g. Standard software with quarterly, pro-active Business Content updates for new international regulatory requirements Prooven full historization, seamless traceability and drill-down from result to source Unified, lean, best practices data model for product based assets and liabilities Single point of truth for product based data for reporting Single point of truth for product based functions, shared responsibilities with custom specific risk engines and amortized cost / fair value servers possible Fully integrated, automated back-office solution
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Overview about IFRA based business solutions
Reconciliation Solution Results Data Layer Limit Management Regulatory Reporting Analyzer (RRA) Regulatory Reporting Interface (RRI) Risk Management (Basel II) Management Accounting (Profitability Analysis) Hedge Management Accounting for Financial Instruments (AFI) IFRS for Insurance Solution Solvency II Solution Highest Volume on customer side: 70 Mio BT‘s per month Source Data Layer (Financial Database) Insurance Analyzer Data Management Solution
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Solvency II Solution
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Solvency II Solution - Overview
The solution will: Produce accurate data on time for Pillar 1 + 3 Ensure auditability and reproducability of data Manage integrated finance and risk data - ensuring single point of truth for both finance and risk data Ensure flexibility to calculate SCR modules inside NEXONTS Solvency II Solution or outside in risk engine.
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Solvency II Solution - Overview
Operational Source and Finance systems Import necessary data to predefined data model in source data layer. Enrich data using derivations and calculations for Solvency II specific needs. Calculate best estimate cash flow Calculate Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) Optionally calculate technical provisions as a whole if a reliable financial instrument is given. Calculate Risk Margin Run Capital Allocation Process to deliver all results in the right granularity. Send detailed results to Supervisory Reporting and Internal Reporting Data Load Process Pillar 1 + Pillar 3 Data Enrichment Process Best Estimate Cash Flow Process Risk Engine SCR and MCR Calculation Process Calculate Technical Prov. as a whole Risk Margin Calculation Process Capital Allocation Process Supervisory Reporting & Internal Reporting GL / FI Solvency II Balance
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IFRS for Insurance Solution
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IFRS for Insurance Solution
„System shifter requirements“: Use your Risk Engine not stand alone, but together with IFRS for Insurance Solution as a complete, integrated strategic solution. Graphic taken from IAS-Board Slides Risk Engine Accounting Risk Engine Accounting Risk Engine Accounting Risk Engine Accounting Risk Engine Accounting
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IFRS for Insurance Solution - Overview
SDL Post External Business Transactions from SDL into Accounting. Run optionally Actual Cash Flow Preparation Process and calculate extrapolations or engage a risk engine for extrapolation. Run optionally Present Value and Risk Adjustment Process, which uses the extrapolated cash flows for calculation. Run Post External Business Transaction, which enriches the operational postings. Run Update Secondary Business Transactions Process, which does the IFRS specific postings. Run Key Date Valuation, which does the IFRS specific valuations. Run GL Connection and Financial Statement Item Process to send data to a FI-GL and BW. Actual Cash Flow Prep. Process Claims / Benefits Premiums Reinsurance Coll. & Disb. Assets Risk Engine Present Value / Risk Adjust. Process RDL Discounting and PV Calculation Risk Adjustment Calculation Insurance Accounting Process Operational Postings GAAP spec. Postings & Valuations BW Reporting Process GL Connector Process
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Reconciliation Solution
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Reconciliation Solution - Overview
Cockpit SAP GL Reconciliation® Solution (based on SAP BW ®) IFRS for Insurance Solution Solvency II Solution Data Management Solution (based on SAP FS-APPL 400® (IFRA) incl. PI) Actuarial Systems Non-SAP or SAP based systems CRM Account Origination Policy Management Reinsurance Management Collections & Disbursem. Financial Asset Management Commissions Management Deposit Management Claims Management Loans Management Contract Accounting Business Partner SAP Pre-defined Sender/Receiver Pairs NEXONTIS Reconciliation Sender/Receiver Pairs
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Reconciliation Solution – Qualitative and quantitative analysis
Qualitative reconciliation examples: „I posted in Policy Management 5 Million of premium. Do i have 5 Million of premiums also in my General Ledger?“ „Last year i payed out 30,5 Million of claims. Do i have 30,5 Million of payed claims also in my Solvency II QRT Report?“ Quantitative reconciliation examples: I sent out 1000 records from Claims Management to Collections&Disbursements. Did i exactly receive 1000 records in my CD system? I sent out 2000 records from Policy Management to Risk Engine. Did i exactly receive 2000 records in my Risk Engine?
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Data Management Solution
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Data Management Solution - Overview
FS-APPL Financial Transaction Business Partner Operational Event Business Transaction Store data in FS-APPL Message and Process Handling BAPI commit transaction processing Create/update data Create/update Create Errors & Messages Financial Transaction Business Partner Operational Event Business Transaction Check for update Derive additional fields Read delta data Parallel Processing Source System Source System Source System
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Data Management Solution - Process
For SAP Systems realtime (qRFC, PI) and for non-SAP System batch (CSV- or XML-Files) is used. Custom specific data extractors create CSV-files. Reads the CSV-files into internal structured tables. Optionally the internal tables are stored into a DB for tracing and reconciliation. Takes internal tables and maps it into SDL Primary Object(s). Chunks the memory records into pieces ( ) and starts parallel processing. Derives additional IFRS and Solvency II specific characteristics. Updates the SDL master data if needed and creates the SDL flow data. Errors from SDL Primary Objects BAPI Interface are handed back to the sender and stear orchestration including possible restart. SAP System Non-SAP System Data Sender Custom specific data extractor Data Reader Optional: DB Trace Data Receiver Custom specific Data Receiver Orchestration and Error Handling Parallel Splitter Optional: DB Trace Data Enrichment Data Enrichment Data Feeder SAP SDL Primary Objects
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