Financial Services Ireland

IFRS 17 and European insurers: What are the implications?

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IFRS 17 and European insurers: What are the implications?

The implementation of IFRS 17 Insurance Contracts for periods commencing on or after 1 January 2021 represents the most significant change to European insurance accounting requirements in 20 years, requiring insurers to entirely overhaul their financial statements.

To date the majority of insurers have, at most, performed only a limited impact assessment for IFRS 17, with implementation projects mobilising through the second half of 2017/early 2018 to analyse and evaluate the impact. Those who have moved beyond IFRS 17 project inception are realising the scale of the challenge, from understanding and presenting their numbers to stakeholders through to impacts on data, processes, systems and reporting timetables in the lead up to and beyond 2021. In the coming years, insurers will need to interpret and apply the requirements to their insurance contracts — a process involving significant time and effort. The major change program required will extend beyond finance and actuarial teams and its impacts will need to be communicated to a broad range of internal and external stakeholders.

Executive Summary

The International Accounting Standard Board (IASB or Board) issued the new Insurance Accounting Standard, IFRS 17 Insurance Contracts (the Standard) on 18 May 2017. The Standard will have to be applied for reporting periods starting on or after 1 January 2021. This standard will represent the most significant change to European insurance accounting requirements in 20 years, requiring insurers to entirely overhaul their financial statements. Given the scale of this change, investors and other stakeholders will want to understand the likely impact as early as possible.

The Standard uses three measurement approaches:

1. General model or Building Block Approach (BBA) — for most long-term contracts

2. Premium Allocation Approach (PAA) — for most short-term contracts (optional)

3. Variable Fee Approach (VFA) — for contracts with direct participation features The principles underlying these measurement approaches result in a fundamental change to current practice, particularly for long duration contracts.

The requirements are markedly different to existing accounting in a number of critical aspects that will:

► Change profit emergence patterns

► Increase the frequency of loss recognition

► Add complexity to valuation processes, data requirements, assumption setting.

The requirements for forecasting results of the new metric is even more challenging than analyzing current results The IASB decided on a mandatory effective date of 1 January 2021 for the new standard. In the coming years, insurers will need to interpret and apply the requirements to their insurance contracts — a process involving significant time and effort. The major change program required will extend beyond finance and actuarial teams and its impacts will need to be communicated to a broad range of internal and external stakeholders.

In addition to the Standard, insurers will need to adapt to a wave of other accounting changes over the next five years, including:

► IFRS 9 Financial Instruments — effective 1 Jan 2018 (although most insurers will be able to defer this to 1 January 2021)

► IFRS 15 Revenue from Contracts with Customers — effective 1 January 2018

► IFRS 16 Leases — effective 1 January 2019 Given the scale of the Standard’s impact, and the complexity of the implementation task, insurers should start formally assessing impacts and mobilize their organizations now — starting with these six actions.

Ciara McKenna

Partner
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