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Julia Irvine 18 May 2017 01:19pm

Insurance sector gets improved accounting model with IFRS 17

The International Accounting Standards Board (IASB) has reached another milestone with publication of its insurance contracts standard, IFRS 17

It means that from 1 January 2021, the 450 listed insurers using IFRS standards, who between them have $13trn (£10trn) in assets, will be able to follow a single principles-based standard to account for all the different insurance contracts – including reinsurance contracts – they hold, rather than the complex arrangements they are currently required to follow under IFRS 4.

As well as improved comparability among companies globally, IFRS 17 will also provide investors and other stakeholders with more useful and transparent information and better information about profitability.

As IASB chairman Hans Hoogervorst said, “The insurance industry plays a vital role in the global economy; high-quality information to market participants on how insurers perform financially is therefore extremely important.

“IFRS 17 replaces the current myriad of accounting approaches with a single approach that will provide investors and others with comparable and updated information.”

The new standard is the result of three intensive public consultations in 2007, 2010 and 2013, and takes into consideration the results of more than 600 comment letters, 900-plus meetings with investors, analysts, companies, actuaries, regulators, standard-setters and accounting firms, as well as a number of roundtables and discussion forums held in 18 countries in 2010 and 2013.

It will require companies to measure insurance contracts at current value. To do so, they will have to use updated estimates and assumptions reflecting the timing of cash flows and any uncertainty relating to insurance contracts.

Today's publication of IFRS 17 marks a once in a lifetime regulatory change in accounting for insurance policies
- Francesco Nagari, global IFRS insurance leader, Deloitte

 

It will also require companies to recognise profits as they deliver insurance services, rather than when they receive premiums.

Companies will have to provide information about insurance contract profits that they expect to recognise in the future.

The IASB says that this information will provide metrics that can be used to evaluate the performance of insurers and how that performance changes over time.

The profession has welcomed what PwC describes as “the biggest shake-up in insurance for decades” but warns that the insurance industry faces major implementational difficulties over the next three and a half years.

As ICAEW Financial Services Faculty head Iain Coke points out, publishing the standard is not the end of the story but the beginning of the next phase.

He says the implementation transition group, which is currently being set up to give guidance on the standard’s application, has a very important job to do in the run-up to D-day, given the 20 years and compromises it has taken to reach consensus on the way forward.

“The standard also needs to be tested in action. Often when new standards are first issued, people can take different interpretations which converge over time.”

Deloitte’s IFRS 17 accounting lead Mark McQueen agrees. Implementing the standard will take substantial effort and will entail major changes to insurance companies’ actuarial and finance reporting processes, systems and data.

“This effort will likely generate implementation costs for many insurers as large as those incurred in the EU for the adoption of the Solvency 11 regulations – estimated between €3bn-€4bn for the EU insurers as a whole.

“We see this effort to be higher for life insurers than general insurers. The long-term coverage underpinning life insurance policies, will require a much more granular set of accounting and actuarial data.”

PwC’s global IFRS insurance leader Alex Bertolotti warned that although the ultimate profits of life insurers won’t change, the emergence of those profits can change significantly.

“Both insurers and their analysts will need to assess the full impact in terms of telling the performance story of their companies.

“Key performance indicators and income statements will look significantly different following implementation.”

He added that companies should already be working on understanding the impact of different assumptions and approaches and how to communicate it, as well as assessing the scale of work and resources required.

Despite the cost and effort involved, Coke welcomed the standard as “a very important step forward”.

“The fact that there is much work to be done during the implementation phase should not take away from the achievement of providing of this common platform on which to build.”

Although the effective date for IFRS 17 is 1 January 2021, the IASB says that companies can apply it earlier. However, in order to do so, they will also have to apply IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers.

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