In May 2017, the International Accounting Standards Board (IASB) issued IFRS17 – Insurance Contracts. IFRS17 will replace the previous interim standard IFRS4.
IFRS17 is effective for annual periods beginning on or after 1 January 2021.
Earlier application is permitted if both IFRS 15 – Revenue from Contracts withCustomers and IFRS9 – Financial Instruments have also been applied
The new statement will be applicable to the insurance industry.
Why has IFRS17 been introduced?
The statement is the first all-embracing and truly international IFRS standard establishing the accounting for insurance contracts.
Below are the difficulties that the insurance industry has faced with IFRS 4 and the recording of insurance contracts that IFRS17 plans to reduce:
- The identification of which groups of insurance contracts are profit or loss making
- An analysis of trend information
- The necessity to cover difficult-to-measure long-term and multifaceted risks with uncertain outcomes
- Insurance contracts are not typically traded in markets
- Insurance contracts may include a significant deposit component. This is an amount the insurer is obligated to pay the policyholder regardless of whether the insured event occurs
The statement will provide updated information about obligations, risks and performance of insurance contracts.
With the intention of increasing transparency in the financial information reported by insurance companies, this will increase the reliance and assurance that Analysts can place in understanding the insurance industry.
Based on based on current measurement model, a consistency in accounting for all insurance contracts can be achieved.
The sustainability and future profitability of companies issuing insurance contracts will be improved by reporting on the changes in estimated expected premiums and payments that relate to future insurance coverage that will be recognised in profit and loss over the remaining coverage period.
What are the high-level changes we can expect?
1. INSURANCE OBLIGATIONS AND RISKS: Companies that issue insurance contracts must report them on the balance sheet as a sum of:
a. Fulfilment cash flows – current estimates of amounts that the insurer expects to collect from premiums and pay out for claims, benefits and expenses, including a timing and risk adjustment
b. Contractual service margin – expected profit for providing future insurance coverage (unearned profit)
2. INSURANCE PERFORMANCE: There are two ways to distinguish how insurers earn profit from insurance contracts, namely:
a. Insurance Service Result – profit earned from providing insurance coverage
b. Financial result – investment income from managing financial assets AND insurance finance expenses from insurance obligations
3. INSURANCE REVENUE: Company to report on insurance revenue the amount charged for insurance coverage when it is earned and not when the company receives premiums
How can Adept Advisory assist?
Adept’s seasoned professionals, with deep long- and short-term insurance expertise, can deliver solutions across Technical Accounting, Project Management, Business Analysis, Data Management and Automation for the early adoption and practical application of IFRS17.