If you are involved in financial reporting and analysis of large insurance companies, I am sure a day would not pass in the year 2022 without thinking of IFRS 17.

IFRS 17 is a comprehensive standard on accounting for insurance contracts – the first time ever we have a proper standard that brings consistency and transparency in measurement, presentation and disclosure of insurance and reinsurance contracts. IFRS 17 replaces IFRS 4 Insurance Contracts (an interim standard which allows a variety of accounting practices) for annual periods beginning on or after 1 January 2023.

If an insurer has deferred the adoption of IFRS 9 Financial Instruments, then there are two massive changes to deal with at the same time. Whilst IFRS 17 drives the measurement of insurance contract liabilities, IFRS 9 affects the measurement of assets backing those liabilities. These two standards, without a doubt, are the most complex IFRS standards to apply.

IFRS 17 measurement approach

IFRS 17 aims to introduce a consistent measurement approach for long-term insurance contracts. The insurance contract liability is based on the building blocks of:

  • Present value of expected net cash flows;
  • Risk adjustment for non-financial risk; and
  • Contractual service margin (unearned profits)

The insurers are required to use current estimates and reflect the full range of possible outcomes, including embedded options and guarantees in the measurement. The presentation of income statement will be different from the current presentation and new disclosures require information on how profits are recognised over time.

The initial adoption of this approach comes with challenges. There are changes required to processes, systems and IT infrastructure within organisations. The management need to explain the impact of IFRS 17, for example, on the financial metrics and key performance indicators.

What if an insurer is only involved in general insurance business?

In this case there is a simplified approach that could be applied. It is referred to as the premium allocation approach. Though there are many similarities to the current accounting for such contracts, there are some differences that insurers need to consider to ensure compliance with IFRS 17.

What are the key challenges to address?

For most insurers, IFRS 17 is expected to have a significant impact. Given that we have less than one year and comparatives need to be re-stated where retrospective approach is possible to apply, insurers should ensure that the implementation plan is on track.

There may be more than one dry run required and the finance teams should be able to understand and explain the numbers coming out from the systems. It is important that the manual workarounds are minimised. This will otherwise further increase the time required to audit the IFRS 17 figures.

If an insurer is adopting IFRS 9 and IFRS 17 at the same time, there will be significant amount of work in the remainder of 2022. The resources and their training must be planned in advance.

If you would like to attend our free IFRS 17 webinar, please register using the link below.

https://us02web.zoom.us/meeting/register/tZEuf-2hrj4rEtf3VzdzKadbm7Atf-7XN0sP

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