Reinsurers will need to rethink their approach to structuring contracts and prepare for the introduction of the International Financial Accounting Standard 17, according to a global roundtable of Guy Carpenter leaders.
IFRS 17 is set to increase the complexity and cost of operating, as companies will be required to report in greater depth how decisions affect their financial position, and to increase cooperation between their actuarial and accounting departments.
“Companies will need to ask how infrastructure can be leveraged for the implementation of IFRS 17,” said David Lightfoot, Head of Global Strategic Advisory – Asia Pacific and Latin America.
“Fair value view of liabilities introduced by IFRS 17 is based on estimates of future discounted cash flows plus a risk adjustment based on the uncertainty of those cash flows, representing an accounting sea change that requires significant implementation efforts.”
Frank Achtert, Head of Capital Optimisation, EMEA, explained how, in the past, re/insurers accounting under IFRS were able to use inconsistent approaches to measure their liabilities.
“IFRS 17 closes this gap in recognition, measurement, disclosure and presentation of insurance and reinsurance contracts. In most jurisdictions, IFRS 17 will become effective in 2021 while some countries will opt for earlier adoption,” said Achtert.
According to Tom Hettinger, Strategic Advisory Leader, U.S./Canada, the novel fair value view and its implementation in IFRS also dramatically change accounting for reinsurance contracts compared to existing local GAAP or U.S-GAAP practice.
“Measurement of reinsurance contracts held follows the same principles, but reinsurance contracts are accounted for separately from underlying contracts, which may lead to an accounting mismatch,” stated Hettinger.
“With IFRS 17, there will be substantial changes in how companies structure their reinsurance contracts because of changing recognition, measurement and presentation of reinsurance contracts and efforts to meet their KPIs,” concluded Achtert.