The integration of IFRS 17 into an insurer’s operations has had a tremendous impact on their financial resources, staffing requirements, IT processes, accounting practices, and actuarial methodologies, to name just a few. The significance of IFRS 17 means many insurers have provided market updates on the status of their implementation project in their 2021 annual reports.
It's important to note that these market updates are provided in line with the requirements of IAS 8. In particular, IAS 8 requires entities to disclose known or reasonably estimable information related to assessing the impact that new, not yet effective, accounting standards (such as IFRS 17) will have on their financial statements. Furthermore, entities issuing interim financial statements will need to comply with the relevant requirements of IAS 34.
Our survey looked at the 31 December 2021 annual reports of 20 large insurers who have a presence in the UK. The sample of companies we selected comprised of 14 general insurers and six life insurers, which includes listed companies, unlisted companies, and subsidiaries of larger groups. We looked at the disclosure notes included in the annual reports, on the basis that this should address the key requirements of IAS 8. Many companies have provided IFRS 17 updates in the front section of their annual reports, which we've considered where available.
We identified seven disclosure themes while we were going through the various financial reports of these 20 companies. Through our assessment of these themes, it was interesting to observe the various levels of disclosure provided by the insurers in the sampled group. Different insurers will be at different stages of their implementation projects, and this may have determined the level of IFRS 17 disclosures they were willing to provide.
Figure 1 illustrates the results of our analysis, based on these seven themes. The bars that are in purple represent the number of insurers that have provided information on that disclosure area, and the grey bars represent the number of entities that have not provided that particular information.
Figure 1: Nature of IFRS 17 updates provided in the 2021 annual report
Firstly, none of the 20 insurers we analysed have provided any information on the expected quantitative impact IFRS 17 will have on their equity and profitability. Although the users of financial statements would have appreciated seeing this disclosure in the 2021 reports, our understanding is that many of these insurers were not comfortable to share this information at this stage. It's likely that some insurers are still finalising their IFRS 17 financial impact assessments, and therefore providing this information now would be too early. Furthermore, some insurers may already have this detail at their disposal, but the information might still be going through their internal governance processes and may also need board approval before it's released to the market.
As mentioned above, although IAS 8 requires disclosure around the impact of a new standard such as IFRS 17, an entity is not required to provide quantitative information if it cannot be reliably estimated. Therefore, it's likely that some of these insurers are still collecting and assessing data before confirming what the impact will be on their financial statements.
For the qualitative impact and project progress disclosures, only 5 and 13 insurers, respectively, have provided some information around these two themes. For these two areas, we expected a much higher majority, if not all, of the insurers to be providing such information in their 2021 reports, given that most would have started their implementation journey some time ago, and that they would already have some idea of the potential impact of IFRS 17 on their operations. Furthermore, as no quantitative information was provided by any of the 20 insurers, users would have at least expected some detail around the qualitative impact of IFRS 17.
Another hot topic included in our analysis was around the disclosure of IFRS 17 Project Costs. Given the complexity of IFRS 17, the costs to implement the standard have been substantial, and disclosing this key piece of information will provide users with some insight into how much an insurer is spending on implementation. Based on our analysis, only three of the 20 insurers have provided this information; their costs ranged between £50 million and £250 million. We would, of course, expect costs to vary materially from insurer to insurer depending on their size, the types of business they write, and when they commenced their implementation journey.
It should be recognised that it's sometimes challenging to provide this kind of disclosure because some insurers may be making use of internal resources to implement IFRS 17 and trying to allocate a portion of these internal costs to its IFRS 17 project. It's also possible that some insurers may be transforming a particular area of operations or have built or purchased multifunctional software that can both perform IFRS 17 and other insurance related calculations (eg, reserving, capital modelling, etc). Therefore, attempting to split these costs between IFRS 17 and everything else may prove to be challenging.
The other focus area of our analysis was on the nature of the measurement model(s) that insurers will use to measure their insurance contracts. Per figure 1 above, 12 of the insurers we analysed have provided some disclosure of the measurement models they expect to use for their insurance contracts. For these 12 entities, most of them have indicated that they will make use of the premium allocation approach (PAA) with a minority plan on adopting a combination of models depending on the nature of their various insurance products. However, for the remaining 8 who've not provided any disclosure around this, we suspect that some of them (specifically non-life insurers), are still assessing which measurement model(s) are applicable to them. We're aware that many insurers, specifically non-life insurers, are still assessing the extent to which they satisfy the eligibility criteria of the PAA for (re)insurance contracts with coverage periods of greater than one year. Many insurers have also indicated that they are in the final stages of refining their methodologies.
Finally, the last two themes we looked at were the impact of IFRS 17 on an insurer’s Solvency II reporting and dividend policy. Only two insurers in our sample provided this information. However, it's unlikely that there will be a significant impact around these two areas since IFRS 17 will mainly have an impact on the way a transaction is accounted for rather than its underlying economics. Having said that, investors and analysts will expect any impacts on dividend policy to be communicated in advance and therefore this disclosure will be keenly watched by such stakeholders.
Overall, we were encouraged to see that most insurers are making progress on their implementation efforts. As most insurers are now reaching the final stages of their projects, it's likely that more information will be provided during the 2022 interim and annual reporting cycles. Furthermore, insurers will probably start publishing quantitative information in their 2022 annual reports, provided this receives timely board approval and that the information is auditable by an insurer’s external auditors.
We anticipate that the 2021 and 2022 annual reports are likely to receive scrutiny from various stakeholders, including shareholders, investors, regulators, etc, and it's important that sufficient and timely disclosures providing quantitative and qualitative information about the transition to IFRS 17 and its impact is provided. Such information should give stakeholders more confidence in the reliability and completeness of the picture presented in the annual report. Insurers may consider providing additional information - such as forecasts, KPIs or alternative performance measures - in the front section of the annual report including in the strategic and directors’ reports.
With only a few months remaining until IFRS 17 goes live, insurers will need to place greater focus on their remaining tasks and ensure that they're completed in time for a seamless transition to the new regime. They will also increasingly want to ensure that they understand and explain how IFRS 17 will change and enhance reporting going forward.
