New insurance contracts standard will trigger a landmark shift in insurers’ financial reporting: EY

Friday, 19 May 2017

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  • IFRS 17 introduces a more consistent accounting model for insurance contract liabilities across the insurance industry
  • Insurers may defer IFRS 9 on financial instruments and implement both standards at the same time
  • New standard will apply to all insurance contracts, including those covering short-term policies (such as motor insurance) and longer-term policies (such as term life insurance and annuities)

The International Accounting Standard Board (IASB) today issued a new insurance contracts standard, International Financial Reporting Standards (IFRS) 17 Insurance Contracts. EY finds that this will trigger a landmark shift in insurers’ financial reporting requirements under IFRS, marking a fundamental change to current practice across the industry.

The IASB’s objective in introducing the new standard is to increase transparency in insurers’ financial statements for their life, general insurance, health and reinsurance products. The new standard will require insurers to provide a balance sheet valuation of their insurance liabilities based on a forecasts of future revenues and expenses and allowing for a systematic release of profit over time. Insurers providing long-term life insurance contracts will be most affected.

Martin Bradley, EY Global Insurance Finance, Risk and Actuarial Leader, says:

“This standard represents the most significant change to insurance accounting requirements in 20 years. In line with the IASB’s stated intention to provide greater consistency in financial reporting, the insurance industry will now have to change the way insurance liabilities are measured, while also providing far higher levels of disclosure compared to existing financial reporting processes.”

“These new requirements coincide with other changes to the reporting for financial assets under IFRS 9 Financial Instruments, and will potentially bring more volatility in reported profit,” Bradley says.

The 1 January 2021 effective date gives insurers an implementation period of around three and a half years after issuance of the standard. While this is a relatively long time-frame compared with other standards, the complexity of IFRS 17, and the requirement to estimate historical amounts when transitioning to the new standard, means insurers will need to start preparing for implementation very soon.

Grant Peters, EY Oceania Insurance Leader says:

“While IFRS 17 doesn’t come into effect for another few years, insurers are likely to start feeling its impact much sooner.”

“The new requirements will make understanding reported profit, and how it has moved between reporting periods, more challenging and decisions made by insurers at the date of transition to the new standard will have a significant impact on future profitability. Given the scale of this change, investors and other stakeholders will want to understand the likely impact as early as possible.”

“Over the next few years, Australian insurers will need to interpret, implement and apply the new standard to their insurance contracts and features – a process that will take significant time and effort. Understanding the commercial impact of IFRS 17 will be important, as will reconciling reported results and equity with the equivalent numbers computed under other regulatory and reporting frameworks, like regulatory capital requirements and embedded value. New systems and processes will have to be built to produce and report the numbers, and metrics for steering the business will change.”

“This is a marathon change program for Australian insurers. Ultimately, the implications of IFRS 17 will go well beyond the reporting function and affect many parts of the insurance organisation,” Peters says.

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