Insights on how IFRS17 will affect the finance industry

KPMG’s Mark Danckwerts explains how IFRS17 will change the way performance is communicated.

by Mark Danckwerts, Partner, head of insurance, KPMG South Africa.

IFRS 17, the new financial reporting standard for insurance contracts, as issued by the International Accounting Standards Board in May 2017, marked the biggest single change to insurance accounting – even bigger than the introduction of the IFRS® Standards itself.

On 25 June this year, after a year of deliberations, final amendments to the reporting standards were published. Key among the amendments was a change to the effective date to 1 January 2023.

Implementing a new standard inevitably presents challenges, and fortunately the delay in the effective date by an additional year alleviated some of the pressure on insurers. IFRS17 presents a new perspective on financial statements because it changes the way analysts and users of financial statements interpret and compare companies.

Greater global comparability and increased transparency will give more insight into an insurer’s financial health. Additionally, premium volumes are no longer the main driver of “top line” and are replaced with revenue gradually released over the contract term. This could mean different profit patterns to those of the past.

The sources of financial performance will be clearer, making the impact that financial risks and investment income have on an insurer’s results to be reflected separately from insurance performance, providing a clearer picture of the underlying profit drivers.

The treatment of current discount rates and assumptions versus ‘locked-in’ assumptions for the various policy cohorts, will almost certainly lead to significant infrastructure and accounting changes for many insurers. Some insurers may even decide to use this opportunity to replace some legacy systems to meet the integration requirements between the data, actuarial and accounting systems.

There is also the issue of governance, where entities will need to develop and enhance controls between potentially more systems and processes. Those that do not intend to automate more of these processes could find themselves overwhelmed by manual processes after the transition.

Identifying, accounting and reporting of onerous groups of contracts will become more prominent for insurers. This, combined with explicitly disclosed margins for non-financial risk, may have consequences to the pricing strategies adopted in future.

Accounting for reinsurance ceded is separate from that of direct insurance contracts and is expected to lead to challenges and even potential changes to the terms and conditions of reinsurance contracts.

The new disclosure requirements will change the way in which performance is communicated to the market and will require some time before it is familiar.

The human talent required to operationalise IFRS 17’s requirements and translate principle into practice is not trivial. This could lead to excessive pressure on actuarial, IT and accounting staff over the next couple of years, leading to scarce resources under pressure.

Insurers should avoid unforeseen implications in financial results and operations by giving themselves a sufficiently long dual reporting period. This will help to correct implementation glitches, streamline operations and adjust business strategy in time for

IFRS17 adoption. This large change in reporting standards could also be seen as an opportunity for improvement.