IASB issues a new insurance contracts standard that will trigger a landmark shift in insurers’ financial reporting – EY comments

London, 18 May 2017

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  • IFRS 17 introduces a more consistent IFRS 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 assurance, endowments 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 the financial reporting of insurers under IFRS, and marks 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 of life, non-life, direct insurance and re-insurance. Insurers providing long-term contracts will be most affected.

The new standard will require insurers to provide a balance sheet valuation of their insurance liabilities that combines a measurement of the expected probability weighted future cash flows based on updated assumptions, with the recognition of profit over the period that services are provided under the contract.

Martin Bradley, EY Global Insurance Finance, Risk & 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 in which insurance liabilities are measured, while also providing far higher levels of disclosure compared to existing financial reporting processes. These changes will coincide with other changes to the reporting for financial assets under IFRS 9 Financial Instruments, and will potentially bring more volatility in reported profit.”

The effective date of 1 January 2021 will give insurers an implementation period of around three and a half years after issuance of the standard. While the IASB has stated that the implementation period is relatively long compared with other standards, the complexity of IFRS 17 will be such that companies will need to start preparing for implementation very soon, as insurers will be required to estimate historical amounts when transitioning to the new standard.

Kevin Griffith, EY Global IFRS 17 Accounting Change Lead, says:

“The new requirements will make the understanding of reported profit and how it has moved between reporting periods more challenging. While the standard will not become effective for a few years, the impact is likely to be felt much sooner by insurers. Investors are likely to ask for expected impacts ahead of the implementation date, and the decisions made by insurers at the date of transition to the new standard will have a significant impact on future profitability.”

“Understanding the commercial impact of IFRS 17, and reconciling reported results and equity with the equivalent numbers computed under regulatory and other reporting frameworks (like Solvency II and Embedded Value) will be important. New systems and processes will have to be built to produce and report the numbers, and metrics for steering the business will change. Ultimately, the implications of IFRS 17 will go well beyond the reporting function and affect many parts of the organization.”

For more information please visit: https://www.ey.com/gl/en/issues/ifrs

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