May 2017
Insurers implementing the International Accounting Standards Board (IASB)’s new IFRS 17 will find the process a major challenge due to the huge scale of the operation, according to Willis Towers Watson.
From 2021, insurers across the world will be expected to use the IFRS 17 reporting standard – the first global accounting standard for insurance contracts.
The current standard, IFRS 4, has allowed local Gaap to be used as a guide in each country, leading to little consistency across borders and among multinationals.
The big change under IFRS 17 will be to increase transparency, giving investors a clearer picture of the returns they can realistically expect on investments and the risks involved.
The new rules require companies to recognise profit when insurance services are delivered, rather than when premium payments are received, as well as to provide information about insurance contract profits that are expected to be recognised in the future.
Complying with the new accounting practices is expected to impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, technology systems and, potentially, executive compensation.
The IASB has warned that applying IFRS 17 will require many insurance companies to gather new information, employ or develop people with appropriate skills and make changes to their financial systems.
Companies are also expected to incur costs in educating staff, updating internal procedures and communicating changes in their reports to external parties. Such activities may involve significant time, effort and cost, the IASB said.
Insurance companies are also expected to continue incurring costs in applying IFRS 17 on an ongoing basis. These will mainly arise from gathering the necessary information to update assumptions for measuring insurance contracts on a current basis.
However, carriers with operations in multiple jurisdictions are expected to reduce costs by applying a globally consistent model for their contracts, which will replace the current country-by-country system.
In addition, the new standard will simplify the measurement of some short-term contracts, such as those with a coverage period of 12 months or less, while a carrier will be able to apply the new requirements to a group of contracts, rather than on a contract-by-contract basis.
And IFRS 17 does not apply to some common contracts issued by non-insurers, such as most product warranties.
Kamran Foroughi, director at Willis Towers Watson, said IFRS 17 was more than just an accounting change and would have a wide and significant impact on insurers’ operations.
“The big change under IFRS 17 will be more transparency,” for investors, he continued.
“However, it will take some time for investors to understand the new information.”
Martin Bradley, EY’s global insurance finance, risk and actuarial leader, called the new standard “the most significant change to insurance accounting requirements in 20 years”.
His colleague Kevin Griffith, EY’s global IFRS 17 accounting change lead, added: “While the standard will not become effective for a few years, the impact is likely to be felt much sooner by insurers.
“Investors are likely to ask for expected impacts ahead of the implementation date, and the decisions made by insurers at the date of transition to the new standard will have a significant impact on future profitability.”
