Spotlight on the IFRS 17

15th January 2018

The new international accounting standard for insurance contracts, the IFRS 17, is out. What is the expected impact on financial results? How should insurers prepare for its implementation, just three years away? Here’s a quick overview of the IFRS 17 that was more than a decade in the making.

Key effects

The IFRS 17, effective 2021, is a new accounting standard for insurance contracts published by the International Accounting Standards Board, or IASB. It will replace IFRS 4, which allows insurers in different jurisdictions to account for insurance contracts based on local accounting standards. Among the key effects of the new standards, according to professional services firm, KPMG, include:
• Greater transparency on profits and earnings: Separate presentations of underwriting and finance results will provide more clarity about the sources of profits and quality of earnings;
• Greater comparability of insurance companies internationally to benefit analysts and users of financial information;
• More consistency in accounting to reflect the current value of any interest rate guarantees and financial options included in the insurance contracts.

Impact on financial results

“No immediate impact” – that’s the view of rating agency, Fitch, because the new requirements in IFRS 17 “do not change the economic substance” of a company’s balance sheet and credit profile, as “the assets held and the financial commitments to customers and creditors are unaffected – it is only their presentation in the accounts that changes”.

However, under IFRS 17, liabilities to be valued are to be based on market discount rates, which could point to greater volatility in their reported financial results and equity.

Top implementation challenges

 “For most insurers, adopting the new standard will have a bigger impact and be a greater challenge than adopting IFRS in the first place.” – KPMG

Ms Mary Trussell, KPMG’s Global Insurance Accounting Change Leader and a partner with KPMG in Canada, commented, “The new standard will trigger a second wave of activity by local accounting and actuarial bodies, tax authorities and prudential regulators – everyone will want to know how the new accounting requirements will interact with capital requirements.

According to the IASB, implementation costs are expected from:
• Having the right talent and skill sets on board for this transition;
• Systems review, modification and new set-ups; 
• Process and procedure changes; 
• Internal education and external communications.

The application of IFRS 17 on an ongoing basis is also expected to incur costs from information gathering to update assumptions for measuring insurance contracts.

Furthermore, as Fitch noted, the sensitivity of accounting metrics to interest rates and financial markets may influence insurers’ design and mix of products, asset-liability management approach as well as hedging and dividend policies.

Mr Frank Dubois, Insurance and Actuarial Advisory Partner at KPMG in Singapore commented, “Insurers will have to consider how the new standard will impact their regulatory reporting as well as Group reporting, if not based on IFRS. With no indication from regulators to converge regulatory reporting requirements to IFRS 17, insurers may potentially be required to maintain at least two sets of financial numbers and reconciling them will be a complex process.”

Preparing for the change

“A huge undertaking for a lot of companies.” – IASB on the IFRS 17 implementation.

In managing the IFRS 17 implementation journey, insurers may wish to consider the following key steps in the preparation process:

• Analyse what the changes mean for the company;
• Comprehend the differences under all reporting requirements to have an overall view of the implication and effort required locally;
• Finance, Actuarial and IT functions to work closely together;
• Evaluate and test new systems and processes;
• Educate business users and investors.

With three years to the IFRS 17 effective date, the IASB has made available support resources here. To access the IFRS 17 Insurance Contracts Effects Analysis report published by the IASB, click here.

Sources: Fitch, IFRS Foundation, KPMG

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