Institute and Faculty of Actuaries



IFRS 17: Are you ready for the new Insurance Standard?The International Accounting Standards Board (IASB) is expected to publish a new standard for insurance contracts (known as IFRS 17) by the second half of May 2017, with an effective date of 1 January 2021. IFRS 17 will include a new basis for valuing insurance contracts in the balance sheet as well as determining revenue/profit in the income statement, with actuarial principles at the core. Whilst the primary change is for financial reporting for listed companies (who report under IFRS), there are wider implications such as the relevance of internal commercial performance measures and potentially the valuations for mergers and acquisitions. The longer term future of UK GAAP for non-listed and mutual insurers (who haven’t adopted IFRS) is still to be decided by the Financial Reporting Council.Following successful lobbying, for most insurers the IASB has agreed to align the effective date of IFRS 17 with a separate standard IFRS 9 covering financial instrument (asset) measurement and presentation in the balance sheet and income statement. This IASB decision helps align the measurement approaches of assets and liabilities and avoids the insurance industry having to restate the asset measurement several times over a small number of years. However, the deferral of IFRS 9 does not apply to all insurers, most notably the bancassurers. IFRS 17 will ensure much greater global consistency compared to the IFRS 4 practice today of permitting local accounting in each country. However, IFRS 17 will not be a global insurance standard as the IASB and the US Accounting Standards setter (the FASB) took their previous joint project in different directions in 2014, with the FASB proposing only “targeted” improvements to US GAAP (currently under development).Issues for insurers?The issues insurers face will vary, depending on the nature of the insurance liabilities, current insurance accounting and existing systems, models and processes. There will be number of key considerations for life insurers, including:A significant change to the recognition of accounting profit. Consistent with other industries there will be no day 1 profit from the writing of a new policy and the impact of changes in demographic and expense assumptions will be spread throughout the contract lifetime rather than posted immediately to profit in the income statement.There will be a low level of grouping of contracts in order to determine the “Contractual Service Margin” (CSM) liability which is the mechanism of deferring and recognising profit. This will impact not only the actuarial model requirements but the financial outcome due to there being no offsetting between groups.The application of the requirements to with-profit contracts will be an area where market practice is likely to develop in the coming years. Unlike today, profit for shareholder owned insurers will not be directly linked to the declaration of bonus (cash basis) and the implications for mutual insurers are not fully clear. There will be a one-time transition exercise to the new standard, notably to assessing the CSM on existing business (the remaining deferred profit to emerge on these contracts) as at 1 January 2020 (as at least one year of comparatives is required).Key considerations for general insurers may include:Whether the premiums allocation approach (akin to current unearned premium method) can be applied to all contracts (for contracts longer than one year a projected cash flow approach is required). How the risk adjustment should be calculated to reflect management’s appetite for risk over the run-off of the claims reserves. The extent to which the illiquidity of cash flows should considered in the discount rates. For all insurers, IFRS 17 will be a different valuation of liabilities compared to Solvency II, for example, the principles underlying the calibration of the discount rate and allowance for risk will be different and there is no concept of the CSM in Solvency II. The divergence between accounting and solvency observed for the first time in the UK from 1 January 2016 will therefore persist for the long term.The Actuarial perspectiveNot only will actuaries need to implement a new valuation basis requiring changes to data, models, methodologies and assumptions, but areas previously often not the responsibilities of actuaries such as the calculation of revenue and profit will also rely on probability based assessment so may fall to the responsibility of actuaries or perhaps more likely require close cooperation between insurers finance and actuarial teams. In addition, there will be extensive new disclosures many of which will require significant actuarial input.Getting ready?Key questions to address include:What does an IFRS 17 implementation programme look like and how much will it cost?How does the balance sheet and income statement behave for each major product line?How does IFRS 17 affect current business decisions and plans?How can systems, models and processes become ready for IFRS 17?How should insurers manage and communicate IFRS 17 alongside solvency/other metrics?When do we first need to communicate IFRS 17 amounts internally and externally?Perhaps for the first time, the publication of an almost global Insurance Standard seems likely and soon enough for insurers to start getting ready!Anthony Coughlan and Kamran ForoughiMembers of the Financial Reporting Group, Institute & Faculty of Actuaries ................
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