Set to reboot the insurance industry, the reconfigured IFRS 17 (International Financial Reporting Standard), issued by the International Accounting Standards Board in May 2017, standardises the measurement and reporting of information relating to insurance contracts.
By Caryn Davies, executive partner and head of GRC and regulatory offerings at IQbusiness
In a current landscape of inconsistent and unstable accounting practices across different jurisdictions, the new regulation comes as a welcome change to regulate accounting treatment across the globe – making it far easier for consumers, investors and shareholders to compare insurance companies’ financial information and make better informed decisions.
A brief overview of IFRS 17
Taking effect in South Africa on 1 January 2021, the overall objective of IFRS 17 is to provide a more useful and consistent accounting model for insurance contracts among global insurance providers.
The new model will replace IFRS 4, taking the previous standard up a few notches by providing specific guidance for measuring insurance contracts across the different accounting rules and practices as well as providing consistent terminology and disclosure requirements across the industry.
The main principles of IFRS 17 include:
* Estimates on future cash flows need to remain current and should maximise the use of consistent, observable market research.
* Discount on cash flows using a market rate reflective of the risk, duration and currency of the insurance contract.
* Measurement of current and explicit risk.
* Expected profit should be deferred and aggregated in groups of insurance contracts at initial recognition while expected profit should be recognised over the coverage period.
* Reporting of insurance contract liabilities on the balance sheet using current assumptions at each reporting date.
With these implications in mind, it’s important to ask yourself how the new regulation could affect the entire insurance industry, and more specifically your business.
The operational impacts of IFRS 17
First and foremost, the new model will change the governance landscape of organisations by directing all policies, standards, procedures and documents.
From a source data point of view, IFRS 17 will improve data management with a heightened emphasis on traceability, data lineage and granularity. Source data will need to be filtered correctly and external data sources covering macroeconomic conditions will also need to be included.
Continuing the topic of data, insurance contracts will be segmented, and data elements will be divided into component parts (a reversal of netting). Finance and actuarial data taxonomies will align completely.
As far as business calculations and analytics go, the following components will need to be calculated:
* Building block and variable fee approaches: including discount rate, expected value of future cash flows, risk adjustments to cash flows and contractual service margin.
* Premium allocation approach: including liabilities for remaining coverage, discount rate, risk adjustments to cash flows, cash flows of claim liability.
When these calculations are made, the IFR S17 methodologies will need to be used. There will also be changes in actuarial and risk models as well as general ledger allocations to reflect the new requirements.
And finally, from a reporting, monitoring and disclosure perspective, IFR S17 will introduce newly formatted financial statements with an updated chart of accounts; new contractual service margin reporting requirements, including the reporting of expected present value of cash flows and risk adjustments; as well as updated reporting rules, tools and systems. Additionally, internal controls and audit procedures will undergo changes.
Extending far beyond the realm of insurance providers, organisations in various sectors will be impacted by IFRS 17 and the key changes it brings. Actuarial scientists, accountants, information technology infrastructure experts, project managers, data experts, process engineers and business decision-makers all have different responsibilities to ensure IFRS 17 compliance.