The introduction of IFRS 17 will see significant change in reporting for insurers. Here's five areas you need to be aware of.
IFRS 17 comes with a range of implementation options, each with different potential impacts across the business.
It will require a structured approach across finance, actuarial, processes, data and systems, governance and operations to be able to efficiently implement the change.
The new IFRS insurance contracts standard is expected to be issued in the first half of 2017, after which firms have just over three years to prepare for the effective date of 1 January 2021.
From a transformational impact on data, people and systems, it has the potential to be more demanding than Solvency II and will apply to all life and non-life insurance contracts.
The International Accounting Standards Board (IASB) is finalising the standard, which aims to increase reporting comparability within the industry through contractual service margin (CSM), a new basis for revenue and profit recognition and an explicit risk adjustment.
In this video, Grant Thornton UK's Simon Perry and Vasilka Bangeova outline the complexities in the new IFRS 17 reporting standards.
IFRS 17: a complex standard
IFRS 17 is a complex standard that will include fundamental changes to current accounting, and a number of companies have already started planning in order to understand the expected impact. The presentation of insurers' financial statements will also radically change.
Over the next three years, we expect the key focus areas for firms to be:
- Understanding the financial and operational impacts on transition and for new business
- Training staff and educating the Board of Directors
- Effective resource planning
- Effective end-to-end programme management
- Implementing efficient data collection and storage solutions, streamlining systems and processes
- Explaining revised metrics to investors and internal management
IFRS 17 timeline
[Source: Grant Thornton UK]
Five areas that will require a pragmatic solution
Given the nature of the standard, a significant level of judgement will be required to develop estimates and adopt the policy options on implementation.
Some of the key decisions firms need to make are:
Level of aggregation
- Analyse product profit profiles
- Define criteria for 'contracts subject to similar risks and managed together' and monitor marketing intelligence
- Conduct 'what if' testing to identify contracts ‘likely to become onerous’ or ‘other profitable contracts’
- Develop data capture routines to group contracts issued no more than a year apart
Methodology to determine the discount rate
- Assess the quality and cost of required internal and external reference data for either calculation approach
- Explore synergies with Solvency II routines and data
- Perform test calculations for a ‘top down' or 'bottom up‘ approach and inform decisions on choice of approach (eg compare quality, speed and level of automation)
Methodology to calibrate the risk adjustment
- Define the preferred approach by reference to entity's risk appetite and diversification
- Analyse how Solvency II methodology can be used and what modifications or data/system enhancements may be required
- Develop disclosures where methods other than the confidence level method is used.
Approach for CSM on transition
- Assess availability of historic data to assess which approach on transition is feasible
- Develop justification for simplifications
- Assist with choices of system solutions – eg develop further existing 'heavy models' or design an 'add-on' for CSM calculation
- Design the logic for data tagging and subsequent capture, analysis and monitoring for each aggregation unit
Implementing alongside IFRS 9
- Analyse liabilities to assess if the entity qualifies for the deferral approach under IFRS 4 changes until application of IFRS 17 or 1 January 2021 (whichever is earliest)
- If the overlay approach is the only option prior to 2021, develop calculation routines, monitoring controls and design disclosure proformas
- Develop a strategy for permitted reclassification of assets under IFRS 9 to use facts at initial application
IFRS 17 is set to fundamentally change financial reporting for insurers. The outcome will be a more consistent approach across the industry, however this may involve a long and challenging path to compliance.
For more information or to discuss the challenges of IFRS 17, please contact Simon Perry.