IFRS 17 is a once-in-a-lifetime-change for insurance companies. It provides a set of new rules to improve the transparency of financial reporting in insurance companies, comparable to those of other industries. This will be a welcome change for analysts and other stakeholders, who have wanted this for a very long time. There will also be a single accounting language for insurance contracts, instead of a wide range of national languages, and better information on real profitability.
Around 450 insurers around the world will be affected by IFRS 17. This figure includes both international organisations and major national players, and all need to be ready to apply these new standards by January 2021. There is therefore no time to stand and look: The urgency is even greater than had been appreciated, as the need to incorporate comparative periods brings forward the project start date to almost now, if you are to be ready in time.
In a nutshell, what will IFRS 17 mean?
Under the current accounting standards, the valuation of insurance contracts is often calculated using historical figures and based on data available at the beginning of the coverage period. In simple terms, it’s cash-based. IFRS 17, however, requires a future-oriented valuation using best-estimate cash flows. It focuses more on the profitability of portfolios or groups of contracts. It therefore establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts.
Changes at the enterprise level
IFRS 17 does not only affect accounting or financial reporting. It may also change the overall financial direction of insurers because it is likely to influence product development, core processes, incentives and much more.
On product development, it may lead insurers to ask whether their products are right for the future, or about the profitability of individual products. The end-to-end nature of IFRS 17 may also lead to questions about processes, such as how to support Fast Close activities, or how it relates to Solvency II processes. There are big questions about its impact on actuarial, accounting and feeder system processes. Staff and executive incentives may also need to change, depending on revenue changes. These are wide-ranging and sweeping issues.
Looking at the implementation of IFRS 17, its principle-based approach offers a lot of flexibility, but also requires intensive analysis. As insurers start to try to answer some of the questions, they will need to think about how to interpret these principles and decide what will work best for each individual insurer.
Questions, questions and more questions
What makes life even more difficult for insurers is that IFRS 17 is not, of course, the only thing on their minds. Managing stakeholders is key for any business, not least insurance, and volatility is a key consideration for many. To reduce volatility – and increase stability – it is necessary to plan early and effectively to manage risks and develop a financial impact analysis, taking into account the effects of individual market parameters and likely changes in the external environment. Put more simply, you cannot predict the future, but you have to try.
Many insurers are also managing multiple statutory and regulatory requirements in parallel. IFRS 17 comes on top of Solvency II and local GAAP. These requirements do not always fit seamlessly together, as even regulators will admit. It is therefore up to insurers themselves to work out where processes and data can serve more than one purpose, and how they can simplify data collection or adapt processes to minimise the pressure. New performance indicators will be needed to understand insurance revenue in the future, and insurers need to be thinking ahead to work out what information will need to be collected.
Forewarned is forearmed. IFRS 17 is a major change, and insurers cannot afford to bury their heads in the sand and hope that everything will be fine. Action is needed to make it work for them.
