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IFRS 17: The opportunities and risks

Insurers’ reporting faces a period of great change, the effects of which will extend well beyond the introduction of IFRS 17 in 2023. I want to reflect here on a few aspects of this change and the longer-term consequences.

Firstly, I’ll recap why the IASB issued IFRS 17. The current standard, IFRS 4, permits many accounting practices, both in relation to the measurement of the liability and profit recognition. Consequently, significant differences exist between countries and between companies, making comparisons between insurers very challenging.

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I was asked recently to prepare consistent pro-forma financial information for four insurance entities based in different European countries. I couldn’t use their existing IFRS reporting because the liabilities were calculated using different policies and methodologies in each jurisdiction. It took some time to explain this to the stakeholders, who had no background in insurance reporting. IFRS 17 will go a long way to ensuring that insurance accounting is consistent under IFRS.

Secondly, I want to examine the longer-term opportunities and risks for insurance reporting.

What are the opportunities?

  • Insurers (and particularly life insurers) have for years grappled with how to explain their financial position and performance, including how they generate cash and create regulatory surplus. IFRS 17 is a much-needed codification for insurance accounting – for example, in relation to revenue recognition and disclosure of the prudence in liabilities. It should enable users of financial reporting to better understand and compare insurers’ financial position and performance – and also, to some degree, enable better comparison with entities outside the insurance sector.
  • The IASB’s recent proposals on presentation and disclosures are responding to investor demand for more comparable information and a more disciplined and transparent approach to the reporting of management-defined performance measures. The insurance sector, like many others, makes significant use of such measures, so standardisation will give users increased confidence.
  • Insurers have a major role to play as climate change affects the economy and society. Insurers have an opportunity to communicate the effect that climate change has on their business models and their role in managing and mitigating the effects of climate change.

What are the risks?

  • IFRS 17 is a significant change for many insurers. Reported equity and profit may differ significantly from that reported under current IFRS. There is a risk that the signals management are communicating to stakeholders are weakened by the noise of unfamiliar numbers. Insurers will need to provide explanations of the new results to users before and after the standard is introduced.
  • There may be disconnects from the measures used to run the business (for example, metrics that are based on Solvency II or current IFRS). Insurers need to ensure management incentives reflect the new reporting paradigms (including any management-defined performance measures) appropriately.

Users of insurers’ financial reporting will benefit significantly from the changes that are coming, even if the road is a little bumpy in the early days. For the insurers, the winners will be those that keep their messaging aligned to their strategy and on-point throughout.

Last updated 23/11/2020