IFRS 17 Insurance Contracts: Are you ready for it?
The International Accounting Standards Board issued IFRS 17 Insurance Contracts in May 2017. Twenty years in the making this standard marks the start of a new age of accounting for insurers. IFRS 17 becomes effective on 1st January 2023 and presents a very challenging implementation time-line.
IFRS 17 is complex and it will have far reaching on the way insurance entities are run. We discuss below the main impact of IFRS 17 senior executives at insurance entities need to be aware of.
Impact on financial statements
The presentation of the profit or loss and the balance sheet will be significantly different under IFRS 17. The profit or loss will look very different from the existing structure because the concept of insurance revenue and insurance expenses is very different under IFRS 17. This will represent a major change. For example, the gross written premiums will no longer be the defining feature of insurance revenue. Instead revenue will be defined in relation to the insurance services provided during the period. All losses due to onerous contracts will need to be recognized immediately whereas all profit will be deferred over the life of the contract. The differences in the financial statements will result in a major change in the chart of accounts and the general ledger. Addressing the resulting gaps will represent a major challenge for the entity.
Understanding the IFRS 17 financial statements will also represent a major challenge for all stakeholders. The disclosures under IFRS 17 are going to be much more detailed then the current state. Moreover, these disclosures will also be very granular because they will be required for groups of contracts. The granular disclosures will represent a major challenge for the entity. However, the stakeholders will probably find the detailed disclosures useful.
Level of granularity
For management and reporting purposes many entities are currently organised by ‘business segments’. The segments represent the major business classes the entity is exposed to. Under IFRS 17 the ‘unit of account’ for financial reporting is expected to be much more granular than the current business segments. This is because under IFRS 17 the unit of account is ‘groups of contracts’ which have similar insurance risk and are managed together. This will probably mean that the entity will be reporting by product type which might be more granular than the current sentimental reporting. Moreover, under IFRS 17 reinsurance contracts are required to be measured separately from insurance contracts which increases the granularity.The increase in the level of granularity will result in:
- More transparency for management, investors, auditors and regulators
- A possible change in the pricing strategy as this will probably have an impact on any pricing cross-subsidy between different groups of insurance contracts even within the same product class.
- Increased possibility of groups of onerous contracts being exposed
- Significantly higher requirement for data storage and robust IT systems.
Gaps in the understanding of IFRS 17 technical requirements:
There are many gaps and it is imperative that the entity develops an IFRS 17 training plan for the senior management and the Board. We think the entity’s IFRS 17 training plan should be follow a step-wise, gradual approach covering the different technical methodology requirements of IFRS 17. This will ensure that the senior management and Board are actively involved in developing the IFRS 17 methodology and understanding the financial impacts of the different options available under IFRS 17 as the methodology and processes are developed. We believe that a successful implementation of IFRS 17 for the entity will depend to a large extent on the active involvement of its senior management and board members. This is because a lot of the IFRS 17 methodology decisions once taken are not reversible.
Data and systems requirement under IFRS 17
Given the granularity of reporting under IFRS 17 and the requirement to reconcile and track historical financial numbers the data storage and IT systems requirements under IFRS 17 are extremely significant. We feel that it is imperative that insurance entities starts engaging early with the systems provider to understand its IFRS 17 capabilities of their current systems.
This is of course a high-level summary of what we believe are main impacts senior management of the insurance entities should focus on. There are of course many other gaps will require a detailed gap assessment.
Next steps on the road to a successful implementation:
As discussed IFRS 17 is very complex. Most insurers have limited experience of the challenge that this will bring. A parallel can be drawn from the Solvency II implementation experience in Europe. Experience with clients in the UK has shown that the full IFRS 17 implementation is expected to take 3-5 years.
We believe that these are the next steps insurance entities should consider when planning for IFRS 17:
- Create an IFRS 17 implementation committee reporting to the Board and develop detailed plans with dedicated resource.
- Company senior management including CEOs, CROs, CFOs, GMs and Actuaries should attend IFRS 17 awareness sessions. One-to-one informal training sessions are likely to be more useful than ‘industry wide training session’ given the complexity of IFRS17.
- Recognise that the implementation will require a major overhaul of the existing IT systems, processes, control and reporting cycles.
- Successful implementation will hinge critically on a close coordination between actuaries, accountants and IT personnel.
- The standard is very different from the existing standards and most appointed actuaries and accountants will find it a challenge to fully appreciate the complexity and spirit underlying the IFRS17 disclosures in the limited time for implementation.
- Actuaries and accountants with Solvency II experience will have a clear advantage.
Author: Faisal Zai is a Fellow of the Institute of Actuaries (UK) and a Fellow of the Royal Statistical Society. He graduated from the University of Oxford with a bachelor’s from the London School of Economics. He has 20 years’ experience across Europe (UK, France) and Asia (Pakistan, Malaysia, Saudi Arabia) in IFRS17, Solvency II, Risk Management, Asset Liability modelling, Derivatives and hedging, Data science and Climate Risk. During this time he has worked on assignments with various insurers including the Bank of England (UK regulator), Swiss Re, Aviva, Sunlife of Canada, Habib Bank.
Disclaimer: The contents of this article is for information only and is not offered as advice. Readers are encouraged to consult a suitably qualified professional adviser to obtain advice tailored to their specific requirements.