1. Are you still in project mode or have you moved to Business as Usual (BAU) – and does that reflect the reality of the situation?
The determination of methodologies and the application of policies is now hopefully complete or towards the business end of proceedings. The challenge of embedding the IFRS 17 & 9 world into BAU processes is not one to be underestimated.
From a stand back perspective, to what extent do the process and controls in the IFRS 17 environment stand up. There needs to be an evaluation of what reliances currently exist upon implementation partners and the degree of handover that has occurred and how well understood the cradle to grave process is.
The strength and resilience of controls now need to be probed. A sign off from internal committees or implementation partners may signal a strong degree of completeness but may not yet meet the rigour required by internal or external auditors.
It is a worthwhile exercise bringing robust challenge to those IFRS 17 BAU areas that are deemed to be sufficiently embedded in BAU to identify any gaps or remediations that may be required for the reporting cycle.
3. For life insurers in particular, how well understood is the Contractual Service Margin (CSM) and how much will translate into future net earnings after add back of non-attributable expenses?
The CSM represents the unearned profit that a (re)insurer expects to earn as it provides services. Unsurprisingly, the derivation of the CSM is seen as the most significant change. This was evident from EY’s analysis of the most recent investor day presentation impacts suggesting that for most (re)insurers there will be a negative impact to book value arising from CSM.
There are a number of inputs, assumptions and techniques to be deployed to arrive at a CSM. The key areas in which IFRS 17 allows judgement, which may lead to variability in computing the CSM, include:
- The identification of contract boundaries
- The determination of coverage units (CUs)
- The level of aggregation
- And the treatment of loss components
We see various practices regarding coverage units, depending on the type of product (including whether investment-type services apply) and the various judgements applied. The CUs drive future profit release pattern from the CSM, which should reflect the provision of insurance contracts services in an appropriate way.
The level of risk adjustment interacts with the level of the CSM as well as the future results through the release of risk. Under many fair value transition methodologies, the difference between the IFRS 17 risk adjustment and the fair value risk adjustment is also the driver of the CSM on transition.
The CSM will require adjustment for changes relating to future service i.e. for a life (re)insurer favourable mortality updates must increase the CSM, unfavourable lapse experience will result in the opposite.
4. What quality gates will the methodologies, models and results be put through prior to disclosure and what assurance has been provided by the External Auditor?
The first challenge for most in the industry is to assess what level of disclosure of IFRS 17 & 9 impacts will be made in the 31 December 2022 financial statements. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires disclosure of an impending change in accounting policies when an issuer has yet to implement a new IFRS that has been issued but is not yet effective.
The expectation is not to be underestimated. The European Securities and Markets Authority (ESMA) issued a public statement in May 2022 which set a significant expectation in terms of the level of disclosure required. This statement called upon the need to disclose qualitative and quantitative information on the new standard to the extent that reasonably estimable quantitative information on the impact is known.
Amongst other minimum requirements, the ESMA statement also called for information on significant accounting policy choices upon initial application to be explained and disaggregated in a way that is meaningful to the users of the financial. It also called for the nature of the impacts on recognition, measurement and presentation to be clearly described in terms of the key drivers of change from the accounting principles under IFRS 4.
Over the course of the last quarter, a number of (re)insurers have recently published IFRS 9 and IFRS 17 updates as part of their 2022 investor days.
At EY we have been analysing these presentations, and whilst the content and depth of these presentation varies, there are quite a few (re)insurers who decided to disclose expected quantitative impacts of adopting IFRS 9 and IFRS 17, in most cases either in terms of change in equity levels or change in net asset amounts. Clearly defined IFRS 17 KPIs is another topic arising from these publications.
Some key highlights of messages to users of the accounts noted by EY include:
- Most insurance groups expect minimal disruptions from IFRS 17 & 9, which is reassuring to the analyst community. Prudential and dividend capacity is not expected to change significantly with the new standard.
- CSM will become a key indicator, impacting reported equity negatively in most instances. Overall insurers are welcoming the new standard for the improvements it brings on disclosures.
- Performance KPIs are shifting to cash-based metrics.
- The planned publication of the impacts of the new standard in the 2022 financial statements vary by insurer. Most of the panel of insurers that were considered do not plan to provide a detailed OBS in their current year results announcements.
- The publication of 2022 comparative numbers should be provided to the market in the HY 2023 presentations for the majority of insurance groups.
- Gross written premiums remains a popular metric with most insurers planning to disclose it as a non-GAAP measure.