In May of last year, the International Accounting Standards Board (IASB) IFRS published 17 Insurance Contracts. This standard replaces IFRS 4 and sets out how insurers should value their insurance contracts. The way analysts interpret and compare insurers’ figures internationally will change. The standard ensures a level playing field for financial reporting. Although the new IFRS 17 rules will enter into force on 1 January 2021, its introduction will lead to a change in accounting policies, which will also require comparative figures to be adjusted. In practice, this means that insurers will have to implement the new standard at least one year before the official entry into force. This requires an impact analysis, reviewing and where necessary, adapting current systems and retraining people to work with this new reporting standard. Besides this complex implementation process, the work of the finance professional in the insurance world will change in different ways. Tom Veerman, managing partner of Triple A – Risk Finance, part of Redmore Group and Geert Stomp, consultant Solutions of Redmore Group, list five changes.
Transparency is one of the objectives of IFRS 17. The introduction of the standard should lead to better comparability between financial reports from insurers. As of 1 January 2021, while signing contracts, insurers will need to show what profits are expected during the term of the contract, the Contractual Service Margin (CSM).
This transparency should lead to better comparability of insurers for investors and other stakeholders. In order to achieve this transparency with comparable reporting as a result, historical data is needed for each group of people with comparable backgrounds. IFRS 17 prescribes a number of methods for determining the value of these insurance contracts. Central is the general model, also known as the building block approach. This model puts pressure on data collectors and requires as much of the historical data as possible to be reproduced and built up.
First-time adoption of IFRS 17 is a challenge because it requires the value of the insurance contract to be determined as if IFRS 17 had always applied. This means that the value of the contract must be determined at the starting date, after which it must be adjusted for all realised securities up to the settlement date. To achieve this and to be able to calculate the changes, an intense demand will be unavoidably placed on the insurer’s technical administration systems. Such historical information will not always be stored in insurers’ administration systems.
The introduction of IFRS 17 will be a tough task; a task that insurers must certainly begin this year. Insurance companies will have to reassess their valuation models and the capabilities of current systems. The changes in valuation will have an impact on the new standard for reporting the balance sheet, income statement and the mandatory additional disclosures and reconciliations. In order to meet the new reporting requirements, more data is required at a granular level.
Unfortunately, many insurers’ administrations are not equipped to look back in time to provide the necessary historical data. For example, it is customary for life insurers to make changes directly on the actual policy value after which the historical data is discarded. This will change with the introduction of IFRS 17. IFRS 17 requires historical data to be retained. However, this requirement cannot yet be met by the current infrastructure of policy administration systems.
The above means that in the coming years insurers will have to work on modifications or additions to the current infrastructure. Actuarial projection models become part of the primary reporting process under IFRS 17. The results of the projection models are fed back into the data foundation (database). With the introduction of IFRS 17 the importance of a direct link between administrative systems, databases and models is only increased.
Stakeholders should be included in the communication. Investors do not want to be surprised. Both the result and the size of the capital will change. Explaining the impact of IFRS 17 on profit and equity, and explaining changes from current GAAP and reporting under applicable regulations requires robust processes, a keen understanding of individual differences, and a transparent communication strategy. The standard can affect dividend payment capacity, product pricing, management remuneration, and market-wide performance figures.
IFRS 4 will end with the introduction of IFRS 17. For many this was the simplest IFRS standard that was in line with current reporting practice and that many professionals could ‘read and write’. Instead of the finance professional relying on prescribed and detailed rules, IFRS 17 is based on principles, which in most cases means that it is the insurer’s responsibility to ensure that policies and disclosures meet the standard’s requirements. This also means that the insurer will have to make many important choices, where the impacts of which are not always clear in advance.
Fortunately, IFRS 17, and its administrative processing for insurance contracts, contains principles equivalent to IFRS 9 (financial instruments). This means that it requires a consistent and up-to-date valuation model and increases the transparency of the reported financial information. Through the proper training of experts and mutual knowledge sharing, the new standard should be familiar to all involved parties in the coming years.
Digitisation and automation have played a very important role for years in almost all sectors including within the financial world. This role will continue to grow as a result of the rapid pace of technological development. One of the inevitable consequences is that jobs will disappear and work will change. However, new jobs will at the same time be created. The work will shift from ‘production’ to ‘analysis’. The data enrichment required for the implementation of IFRS 17 can be automated by integrating a tool that automatically recognizes linked files so that everything is already neatly pre-sorted. Nevertheless, human thinking power still provides the last and most important sanity check.
Every new standard involves extra work. However, the advent of IFRS 17 is so fundamental that its impact is incomparable. At the same time, insurers must also introduce IFRS 9. These two projects need to be well coordinated because choices must be consistent. It is inevitable that IFRS 17 will have a major impact on IT architecture. Current systems cannot provide the necessary information. Due to the major impact on assets and results, insurers cannot wait until the last moment to make choices and set up these systems. Finance professionals will also have to prepare themselves well, because they are already involved, or will be in the future, in the process of implementing IFRS 17. In addition, managers will have to think carefully about current personnel, and whether they have enough in-house expertise to meet the legislation standard beginning 1 January 2021. IFRS 17 is a global standard and will ultimately have a major impact on business, including your own.
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