The International Accounting Standards Board (IASB) has released a new global basis for insurance contracts accounting, with the issuance of the International Financial Reporting Standards (IFRS) 17, which industry experts have called “the biggest shake-up of financial reporting for decades.”
IFRS creates a common global language for business, enabling easy understanding of company accounts across international boundaries, as it increasingly replaces many different national accounting standards – the updates are said to make reporting more transparent and comparable.
The changes have, however, been met with some concern from within the industry over whether they take the long-term aspects of the re/insurance business model into adequate consideration.
Alex Bertolotti, Global IFRS Insurance Leader at PwC, said all insurers reporting under IFRS and organisations writing insurance contracts such as banks with equity release contracts would be impacted by the changes.
“The IASB’s aim is to provide more transparency and comparability than the current accounting standards. It is, however, complex and the detail of the standard together with the forthcoming guidance over implementation will play a significant role in the ease or otherwise of adoption of the standard,” said Bertolotti.
The PwC IFRS expert believes that for life insurers ultimate profits would remain the same, but that the way profits emerge in financial reporting could change and systems and processes, particularly for data gathering, will need to be updated in response to the new reporting requirements.
“Key performance indicators and income statements will look significantly different following implementation,” he said.
“There are things firms should be doing now to understand and communicate the impact of different assumptions and approaches, as well as to assess the scale of work and resources required.
“Systems and processes will likely change significantly to accommodate the granularity of data needed to comply. We have already noticed a trend of companies taking the opportunity to revamp and update legacy systems, as part of wider transformation projects, to get a bigger return for their investment,” he said.
Olav Jones, Deputy Director General of Insurance Europe – the European re/insurance Federation – added that the IFRS 17 was made in close collaboration with European insurers, who had voiced concerns over a lack of representation of important aspects of their business model, in particular; “the long-term nature of insurance and its foundation on pooling of risks. The IASB recognised some of the essential issues raised by the industry, but important concerns remained.”
He said the IFRS 17 represented a very signficant change that would require substantial cost and effort for its implementation and that Insurance Europe would be fully engaging in the EU endorsement process to ensure the standard is suitable for European insurers.
Fitch Ratings said no immediate rating changes were expected as a result of the new financial accounting standards, since these don’t change the economic substance of a carrier’s balance sheet, its only the presentation within the accounts that will be impacted.
Although, the rating agency added, in the medium term “accounting standards may influence insurers’ business models, which could affect their credit profile. In particular, the timing and profile of profit recognition under an accounting system may make certain products more or less attractive.
“The sensitivity of accounting metrics to interest rates and financial markets may influence the design and mix of products that insurers offer, their asset-liability management, and their hedging and dividend policies,” said Fitch.