Implementing IFRS 17 Insurance Contracts
IFRS 17 is the first comprehensive and truly international IFRS standard establishing the accounting for insurance contracts issued by a company. It replaces IFRS 4—an interim standard. IFRS 4 does not prescribe the measurement of insurance contracts and instead allows companies to use local accounting requirements (national GAAP), or variations of those requirements, for the measurement of their insurance contracts issued.
IFRS 17 represents a major change programme for insurers, extending beyond finance and actuarial teams. It will impact insurers’ processes, people and technology, with many work streams and responsibilities involved.
Given the size of this change, the associated costs and the risk that an ineffective implementation would present to the business, getting the implementation programme right is crucial.
Industries in scope
Four broad categories of insurance companies can be identified, based on a common industry classification:
- Property and casualty insurers
- Life and health insurers
- Multiline insurers
Banks and investment companies with significant insurance operations, such as banking groups with insurance subsidiaries, will be affected by IFRS 17 in the same way as insurers.
The implementation of IFRS 17 will require many insurance companies to gather new information and make changes to their financial systems. These implementation activities are likely to require significant time, effort and cost.
With any new IFRS standard, the implementation costs typically vary for different companies depending on their jurisdiction and existing risk management and insurance accounting practices. For IFRS 17, this variability is even more pronounced because the wide range of existing insurance accounting practices used by companies in applying IFRS 4 involves different levels of change in accounting for insurance contracts across companies.
Critical to get finance involved
Due to the complexity involved in an IFRS 17 implementation programme, it is important that the finance team plays a key contributing role. The finance team can provide assurance that the programme is running effectively, and identify and address risks when they arise.
Involvement of the finance team should span across the whole IFRS 17 life cycle, including:
- Group finance strategy
- Project governance
- Core system changes
- Knowledge management and staff training
- Process change management and testing
Connected reporting and compliance reduces the implementation cost
Leveraging a connected reporting and compliance platform as part of your IFRS 17 programme will reduce the implementation costs through the enablement of:
- Enhanced analysis of data with sufficient granularity to identify and maintain consistent groups of contracts in line with IFRS 17 requirements
- Tracking of information about inception dates and the coverage period of those groups of contracts
- Determination of the contractual service margin, accrete interest on the contractual service margin and the contractual service margin for each group of contracts in profit or loss
- Storage of information about historical, current and future cash flows, discount rates and risk adjustments for each group of contracts
- Reduced risk in the use of actuarial techniques to determine probability-weighted cash flows, discount rates reflecting the characteristics of those cash flows and risk adjustments reflecting the uncertainty in timing and amount of cash flows
- Assumptions about cash flows, discount rates and risk at each reporting date
- Actuarial information and documented assumptions
Don't leave it too late
European insurers have taken note of the call by the European Financial Reporting Advisory Group (EFRAG) to move the effective date to 1 Jan 2023. Many companies have indicated that they see no reason to be early adopters of IFRS 17, even where they have already adopted IFRS 9 and IFRS 15.
Many companies realise the extra complexity associated with implementing IFRS 17 and have commenced looking at their data, governance and business model ahead of the effective date to ensure they get their implementation programme right.
Schedule a demonstration of the Workiva platform to see why organisations are turning to connected reporting and compliance as part of their IFRS 17 implementation programmes.
About the Author
Conor has over 20 years of experience as a senior finance executive for multinational corporations. He is a fellow of the Institute of Chartered Accountants in Ireland (FCA). He was also a Member of Council at the Institute of Chartered Accountants in Ireland from 2002–2005.