Source: Willis Towers Watson
On 18 May 2017, the International Accounting Standards Board (IASB) published IFRS 17 Insurance Contracts, twenty years after the IASB’s predecessor initiated the insurance contracts project. The new standard, which will replace IFRS 4 for accounting periods beginning on or after 1 January 2021, is a major milestone for the insurance industry as it represents the first ever near global accounting standard for insurance contracts.
IFRS 17 consists of 132 paragraphs together with a further 777 paragraphs containing Application and Transition Guidance, Illustrative Examples and Basis for Conclusions. The standard sets out a comprehensive methodology applicable to all insurance and reinsurance contracts, both long- and short-term, as well as investment contracts with discretionary participation features.
IFRS 17 represents a major departure from current insurance accounting practices in many jurisdictions which will fundamentally change both how and what insurance companies report to shareholders, policyholders and other stakeholders.
This is more than “just” an accounting change: IFRS 17 will have a wide and significant impact on insurers’ operations and implementation will be a major challenge. Some of the key impacts include:
- The standard is not a step-by-step manual – it requires interpretation and judgement
IFRS 17 is truly principles-based, which, in many respects, is to be welcomed. In many areas, the onus is on the entity to ensure that policies and disclosures comply with the standard’s requirements rather than it being able to rely on prescriptive and detailed rules. However, this does leave a wide range of potential methodology options, and a clear interpretation plan is required for implementation.
- Implementation will be complex
Insurers should not be complacent about the task ahead; while an effective date of 2021 appears manageable, this will require an opening balance sheet as early as 1 January 2020, only 31 months hence. And, for companies reporting quarterly results, the first published IFRS 17 numbers will be made public a mere four years from now.
- Managing stakeholder expectations
Explaining the impact of IFRS 17 on profits and equity, and the variances to current GAAP and reporting under applicable regulatory regimes will require robust processes, a keen grasp of the individual differences and a transparent communication strategy. This may have an effect on dividend-paying capacity, management bonuses and market-wide performance metrics. Many performance metrics currently used by the industry will change or disappear completely from the primary statements.
- Dealing with volatility in profits
Though the IASB reacted to comments on the Exposure Drafts issued in 2010 and 2013 in order to allow insurers to mitigate some of the volatility in profits, the remeasurement of liabilities at each reporting date together with a more granular approach to recognising onerous contracts will inevitably increase volatility compared to existing models, particularly any based on locked-in assumptions. Similarly, choices affecting opening equity on transition may significantly impact margins available to manage future revenue streams.
- Complex actuarial cash-flow models required
Insurers will need to integrate and coordinate actuarial, finance and IT specialists, as well as underwriting and reinsurance, in order to ensure a smooth and timely implementation process. Many of the fundamental inputs to and mechanics of the liability models will be actuarial in nature. For those insurers operating in regulatory regimes with some similar aspects (e.g. Solvency II), significant differences will exist.
- Automation part of the solution
IFRS 17 will drive many insurers to radically overhaul their reserving and reporting processes in order to be able to produce reliable numbers within the tight deadlines imposed by capital markets. Aligning and industrializing processes will be a key element of any successful implementation project – the days of multiple spreadsheet workarounds and extensive manual reconciliations are over.
Posted on Thursday May 18