IFRS 17 dubbed 'biggest shake up of insurance reporting' and 'major challenge' for the sector

The introduction of IFRS 17, the new international accounting standard for insurance contracts, is the biggest shake up of insurance reporting for decades as it will impact profit, equity and volatility, as well as reserving and financial reporting processes, according to industry experts.

IFRS 17 has been developed and presented by the International Accounting Standards Board (IASB) and aims to improve transparency and comparability among insurers and across jurisdictions.

Willis Towers Watson said that the implementation will be a major challenge for insurers and investors. According to the consultancy, the long-awaited IFRS 17 will usher in a wave of unprecedented change to current insurance accounting practices, fundamentally changing how and what insurance companies have to report.

“The new standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems, and potentially executive remuneration, so insurance companies should not underestimate the work required,” said Kamran Foroughi, director at Willis Towers Watson.

Among the biggest challenges for insurers is the interpretation and judgement of the new rules, according to Willis. IFRS 17 is truly principles-based, which in most cases will mean it is the insurer’s responsibility to ensure policies and disclosures comply with the standard’s requirements, rather than it being able to rely on prescriptive and detailed rules.

Another difficulty is dealing with volatility in profits, according to the consultancy. The hybrid model proposed will increase volatility compared to existing models, particularly those based on locked-in assumptions.

Managing stakeholder expectations is another issue. Explaining IFRS 17’s impact 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 affect dividend-paying capacity, management bonuses and market-wide performance metrics, Willis said.

Alex Bertolotti, global IFRS insurance leader at PwC, commented: “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 IASB's aim is to provide more transparency and comparability than the current accounting standards. It is, however, complex and the detail of the standard together with the forthcoming guidance over implementation will play a significant role in the ease or otherwise of adoption of the standard.

“One thing is clear, particularly for life insurers - whilst ultimate profits will not change, the emergence of those profits can change significantly.”

Europe’s insurers cooperated closely with the IASB and voiced concerns where important aspects of their business model were not adequately reflected, in particular; the long-term nature of insurance and its foundation on pooling of risks, lobby group Insurance Europe said. While the IASB recognised some of the essential issues raised by the industry, important concerns remained, the organisation noted.

“IFRS 17 represents a very significant change and the implementation cost and effort for it will be substantial. However, there has been very limited testing and evaluation of the standard at the IASB level. Indeed, key aspects of the new requirements have only recently been developed and major parts of the final text have only been seen by very few insurers. Therefore, it has not been possible for the industry to make a proper assessment until now. We need to ensure that the standard is suitable for Europe’s insurers and to this end Insurance Europe will fully engage in the EU endorsement process.”

IFRS 17, previously referred to as IFRS 4 Phase II, is due to replace the existing IFRS 4 standard from 1 January 2021. However, industry lobbying may impede its adoption in some jurisdictions, and it will not be adopted in the US, according to Fitch Ratings.

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