IFRS 17 is a new accounting standard
for insurance contracts which will totally overhaul the way financial
statements are prepared and presented for insurance companies. The new standard
will achieve much greater consistency between various jurisdictions and also
consistency with other accounting standards. It’s one example of this is a
consistency with IFRS 15 which is revenue. IFRS 17 recognises revenue over
the duration of an insurance contract. The standard achieves this by requiring
companies to establish a liability for future profit on initial recognition and
releasing this liability to profit as the contract obligations are met. The new
standard requires much more granular grouping of contracts. One example of
this is the contracts will be required to be grouped into those that are issued
no more than 12 months apart. Now this will be quite a challenge for some
companies. IFRS 17 allows a simplification of premium recognition
for insurance contracts that are variation one year or less so this would
apply to most typical non-life insurance contracts. However the rest of IFRS 17
will still apply to these contracts so items like contract grouping and the
new contract groups will still apply to these contracts. This could present quite
a challenge for non-life insurance companies in their reserving for
liabilities. Many companies currently would use reserving an accident year
type basis and they may need to consider changing to underwriting the year basis
which would be quite an overhaul for some companies in their reserving. Many
insurance companies have been preparing for Solvency II for a number of years now
and that came into effect in 2016. The preparation for Solvency II will be of
benefit to companies in preparing for IFRS 17. However IFRS 17 is
quite a lot broader than solvency II. For example Solvency II focused on balance
sheet and capital, IFRS 17 cuts across all the financial statements and even
within the balance sheet, Solvency II is quite prescriptive where as IFRS 17 is
actually much less prescriptive so companies will need to consider how they
approach the discount rates, risk margin and other concepts like that.
The transition time for IFRS17 could present challenges for many
companies. One area of particular challenge could be the requirement to
establish a reliability for future profit for contracts. This could
potentially lead to reductions in shareholder funds on transition. We’re
finding with our clients that they’re trying to get an early understanding of
the potential impact of this on their financial statements because this could
impact capital investment and dividend decisions between now and transition.
The new standard comes into effect in 2021 which means financial statements will
need to be ready 2020 for comparative purposes. The sooner companies
get an indication of the scope and scale of of the
challenges and also the impact on financial statements the better.