Regulatory Technology Advice | Deployment | Development | Optimisation
Most insurance firms have now begun preparing for IFRS 17 (insurance contracts) and it is estimated that over 15% currently have an IFRS 17 implementation project underway. IFRS 17 is intended to provide a single accounting standard that will benefit both investors and insurers. It is a replacement for IFRS4 the standard that permitted “a myriad of accounting practices”, according to IASB Chairman Hans Hoogervorst.
Over 120 countries adhere to IFRS standards with insurers in Asia and Europe affected most, however the US will continue complying with US GAAP accounting rather than adopting IFRS 17.
IFRS 17 will alter the measurement of profit and equity in insurers’ accounts and affect the presentation of financial statements. Profits will henceforth be recognised as insurers serve customers, rather than the current practice of earning profits as products are sold. Insurers will need to calculate how cash-flows emerge from contracts over their lifetime and at point of sale and will need to measure the expected profits in the so-called contractual service margin (CSM). Profit calculated at point of sale will be adjusted on a regular basis to account for updated assumptions on risks, interest rates, etc.
Life insurers will find the transition harder than non-life firms, because contracts for one year or less can use a simplified approach whilst contracts greater than one year are obliged to calculate the CSM. IFRS 17 is principles-based and insurers will need to interpret and make judgements on the new rules. The standard will require changes to systems and processes to deal with new calculations and will require a more detailed level of information concerning contracts and will need regular updating to calculate CSM as assumptions change. Insurers with written contracts spanning multiple years will need to review them and calculate the CSM when they were first written.
As a first step, an impact assessment is recommended and planning initiated to design the system changes that will be needed to achieve compliance. By 2020, insurers should have prepared full IFRS 17 results and familiarised investors and analysts with the new disclosures so that full implementation of the standard is possible in 2021.
The new standard will be complex and there will be differences concerning current accounting in both liability measurement and profit recognition. The financial and operational implications of IFRS 17 implementation will require a fundamental change in insurers’ accounting practices and provide a major challenge for much of the industry. There are, however, opportunities to optimise adoption, both operationally and in terms of financial performance.
The principles underlying the new standard are broadly similar to current practices, however the detailed requirements are markedly different. These changes will re-shape primary statements and change financial statement disclosures and changes to the data gathered and maintained will also be necessary.
A structured approach to planning your IFRS 17 implementation project will help you overcome the coming challenge and Millennium Affine is well placed to help. We work with the worlds leading IFRS 17 software providers and are well positioned to guide and advise you through IFRS 17 technology implementation.
To discuss your IFRS 17 challenges and how they can be overcome contact Phil Keet, Regulation and Compliance Director at firstname.lastname@example.org.