The International Accounting Standard Board (IASB or Board) issued the new Insurance Accounting Standard, IFRS 17 Insurance Contracts (the Standard) on 18 May 2017. The Standard will have to be applied for reporting periods starting on or after 1 January 2021.
This standard will represent the most significant change to European insurance accounting requirements in 20 years, requiring insurers to entirely overhaul their financial statements. Given the scale of this change, investors and other stakeholders will want to understand the likely impact as early as possible.
The Standard uses three measurement approaches:
- General model or Building Block Approach (BBA) — for most long-term contracts
- Premium Allocation Approach (PAA) — for most short-term contracts (optional)
- Variable Fee Approach (VFA) — for contracts with direct participation features
The principles underlying these measurement approaches result in a fundamental change to current practice, particularly for long-duration contracts. The requirements are markedly different to existing accounting in a number of critical aspects that will:
- Change profit emergence patterns
- Increase the frequency of loss recognition
- Add complexity to valuation processes, data requirements and assumption setting.
The requirements for forecasting results of the new metric is even more challenging than analyzing current results.
The IASB decided on a mandatory effective date of 1 January 2021 for the new standard. In the coming years, insurers will need to interpret and apply the requirements to their insurance contracts — a process involving significant time and effort. The major change program required will extend beyond finance and actuarial teams and its impacts will need to be communicated to a broad range of internal and external stakeholders. In addition to the Standard, insurers will need to adapt to a wave of other accounting changes over the next five years, including:
- IFRS 9 Financial Instruments — effective 1 Jan 2018 (although most insurers will be able to defer this to 1 January 2021)
- IFRS 15 Revenue from Contracts with Customers — effective 1 January 2018
- IFRS 16 Leases — effective 1 January 2019
Six actions to kick-start your implementation program:
- Educate the executives on the new requirements and implications
- Identify the key methodology and design decisions and assumptions driving implementation
- Analyze the financial, operational and system implications
- Draft budget and plan resourcing requirements
- Assess implications for other current or planned programs of activity in the next three to four years
- Assess strategic and product implications