The International Accounting Standards Board (IASB) warns that the implementation of IFRS 17 will be a major challenge for insurers and investors, according to Willis Towers Watson.
The long-awaited IFRS 17 will usher in a wave of unprecedented change to current insurance accounting practices, fundamentally changing how and what insurance companies in Asia and across the globe have to report.
“IFRS 17 is more than ‘just’ an accounting change, and will have a wide and significant impact on insurers’ operations,” says John Nicholls, Senior Consultant and Willis Towers Watson’s lead on IFRS for insurers in Asia Pacific.
“The current standard, IFRS 4, has in countries where it is applied, allowed local GAAP approaches to be used in each country, which has meant very little consistency across countries and multinationals.
“The big change under IFRS 17 will be more transparency, giving investors a clearer picture of the returns they realistically expect on their investment and the risks to those expected returns. However, it will take some time for investors to understand the new information.”
Twenty years after the IASB’s predecessor initiated the insurance contracts project, the new standard will replace IFRS 4 for accounting periods from 1 January 2021 and represents a major milestone for the insurance industry as the first ever global accounting standard for insurance contracts.
“Four years may seem like a long time, but adequately preparing for the new complexity of IFRS 17 will be a challenge, particularly in Asia where there is a diversity of current accounting practices,” said Nicholls.
“The new standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems, and potentially executive remuneration, so insurance companies should not underestimate the work required. The additional complexity will also affect communication with investors.”
Analysis by Willis Towers Watson notes that IFRS 17 is truly principles-based, which in most cases will mean it is the insurer’s responsibility to ensure policies and disclosures comply with the standard’s requirements, rather than it being able to rely on prescriptive and detailed rules.
The hybrid model proposed will increase volatility compared to existing models, particularly those based on locked-in assumptions.
Explaining IFRS 17’s impact on profits and equity, and the variances to current GAAP and reporting under applicable regulatory regimes will require robust processes, a keen grasp of the individual, notes the consultancy.