What does IFRS 17 mean for insurance accounting?

 Organisations are facing a raft of new regulations over the coming years, bringing both benefits and challenges to the way they do business.

 

MiFID II and the GDPR have been the primary concerns for many enterprises, with both presenting significant changes among corporate governance departments across the UK and beyond.

 

In comparison, the IFRS 17 international insurance accounting standard may seem like a distant concern. Developed by the International Accounting Standards Board (IASB), IFRS 17 won’t come into force until January 1st 2021, leaving organisations with three-and-a-half years to prepare.

Complexity breeds urgency

There’s a reason for such a prolonged timeframe.

 

“This standard represents the most significant change to insurance accounting requirements in 20 years,” said Martin Bradley, EY Global Insurance Finance’s risk and actuarial leader.

 

According to EY, the complexity of the set of standards is such that organisations will need to begin preparing very soon. The Big Four firm said these comments in May – when the IASB first issued the standard instructions.

 

So let’s take a look at some of the aims of IFRS 17, as well as which firms will be most affected and the key predicted impacts.

Who will IFRS 17 affect?

IFRS 17 is meant to revolutionise how insurers approach financial reporting. It will bring a single standard for accounting that both investors and insurers can follow.

 

The extent of change required at each firm will vary, with life insurers taking the brunt of the impact due to amendments in current discount rates and the end of ‘locked-in’ assumptions.

 

IASB data suggests that 450 listed insurers use IFRS standards, which means approximately $13 trillion (£9.8 trillion) of total assets are under its purview. European and Asian insurers comprise the majority of businesses, with the US remaining under the generally accepted accounting principles (GAAP).

What are the key expected outcomes?

IFRS is expected to bring a new level of comparability and transparency to the profitability and overall financial health of insurers. Specifically, greater scrutiny will be given to insurance contracts, firms’ source of profits and the quality of their earnings.

 

KPMG has provided a summary of the main impacts:

 

Key financial metric changes: IFRS 17 will end the trend of premium volumes driving the top line due to investment components and cash no longer being considered revenue. Profit releases may follow far different patterns for some insurance contracts as a result.

 

Clearer performance indicators: Insurance performance and the effect of financial risks on insurers’ results will be presented separately, ensuring profit drivers are more easily identifiable.

 

Communication revolution: IFRS 17 necessitates new presentation and disclosure procedures, meaning insurers must introduce new KPIs and educate internal and external stakeholders.

 

Systems updates on the horizon: Many insurers will require new data, processes and systems to comply with the standard.

 

Life insurer burden: As mentioned, accounting changes will be significant for life insurers. The standard means organisations must calculate how cashflows emerge from contracts over their lifetime, as well as measure predicted profits in a new contractual service margin (CSM).

 

The challenge for non-life insurers: Businesses dealing in contracts that last one year or less can qualify for a simplified IFRS 17 system, named the premium allocation approach (PAA). They will still face challenges, but are expected to find the transition easier overall.

 

Streamlining opportunities available: Organisations that have begun assessing IFRS 17 are already seeing opportunities to centralise and simplify services. The earlier insurers address the changes, the more likely they are to enjoy benefits, according to KPMG.

 

Scarce human resources issues: Firms require significant staff resources to not only implement IFRS 17 but also remain flexible to a second wave of changes that could result from the standard due to local tax authorities and prudential regulator actions.

Preparing for IFRS 17

Insurers may have more than three years to prepare for IFRS 17, but the standard poses such broad and significant changes for insurers that early groundwork is crucial to facilitate the shift.

 

“There will be no ‘one-size-fits-all’ effect for insurers. But every insurer is certain to see impacts on its reported numbers in one way or another,” Joachim Kolschbach, KPMG’s global IFRS insurance leader.

 

“Their significance will depend on an insurer’s previous accounting policies – which have differed across jurisdictions and, in some cases, even within jurisdictions.”

 

Businesses may need to strengthen their regulatory compliance and other functions in order to deliver new systems, processes and controls for IFRS 17.

 

If you need to discuss IFRS 17 needs or other corporate governance issues in the pipeline, please contact Barclay Simpson today.

 

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