IASB overhauls insurance accounting with issuance of IFRS 17

The International Accounting Standards Board (IASB) has announced IFRS 17, a new set of regulations that create an international Standard for insurance contracts.

The measures are designed to simplify and standardise insurer’s often complex and disparate financial statements, allowing for ease of comparison between international companies for investors.

IFRS 17 has been 20 years in the making, and Francesco Nagari, global IFRS insurance leader at Deloitte, called it a “once in a lifetime regulatory change in accounting for insurance policies”.

Alex Bertolotti, global IFRS insurance leader at PwC, echoed this sentiment, adding that: “IFRS 17 is the biggest shake up of insurance reporting for decades, impacting all insurers reporting under IFRS and even some other organisations writing insurance contracts such as banks with equity release contracts.”

The new regulations will go into effect on 1 January 2021, but can be applied sooner, which companies may choose to take up considering the costs and efforts of implementation. Nagari commented: “To implement IFRS 17 will take substantial effort.

“The measurement of insurance liabilities will reflect market interest rates and the impact of policyholders’ guaranteed benefits.

“The revenue from insurance policies will be reported systematically over the coverage service period.

“The expected profit from the remaining coverage service period will be explicitly reported as a component of the insurance liability.”

Mark McQueen, IFRS 17 accounting lead at Deloitte UK, discussed the expected costs: “Deloitte expects that implementing these new IFRS 17 requirements 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 European Union for the adoption of the Solvency II regulations – estimated between three and four billion Euros for the EU insurers as a whole.”

Complying with the new Standard will require more work from some countries than others due to varied national standards.

Life insurers will also be affected more than other sectors. McQueen observed: “We see this effort to be higher for life insurers than general insurers. The long-term coverage underpinning life insurance policies, together with the more common presence of options and guarantees in life-policies, will require a much more granular set of accounting and actuarial data.”

Bertolotti of PwC elaborated: “One thing is clear, particularly for life insurers – whilst ultimate profits will not 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.

“There are things firms should be doing now to understand and communicate the impact of different assumptions and approaches, as well as to assess the scale of work and resources required.

“Systems and processes will likely change significantly to accommodate the granularity of data needed to comply. We have already noticed a trend of companies taking the opportunity to revamp and update legacy systems, as part of wider transformation projects, to get a bigger return for their investment.”

IFRS 17 replaces IFRS 4, an interim measure put in place by the IASB in 2004 that created national accounting Standards, resulting in multiple different methodologies.

IFRS 17 is the first international Standard of its kind and aims to eliminate international inconsistencies by implementing a Standard across all IFRS jurisdictions globally.