Following an extended period of preparation, this year saw many insurance companies worldwide implement the most significant change in global accounting standards in almost two decades the International Financial Reporting Standard (IFRS) 17 came into force. John Bowers, Actuarial Product Director, RNA Analytics, tells us more.
Created to standardise insurance accounting at a global level, the new standard was designed to produce a better understanding of individual insurers’ financial positions, performance and risk exposure by establishing a uniform approach that would improve comparability and increase transparency.
In the six years since plans to implement the new standard were announced by the International Accounting Standards Board, insurers around the world have made differing degrees of progress, with varying levels of success in implementation.
Depending on their footprint and available resources, insurers have faced considerable challenges in understanding and dealing with the operational impacts of the new standard on data, systems and processes – both technical and practical.
Eight months since the deadline for transition, what does the global picture for readiness look like? And just how successful have the original goals of the standard been?
Disclosures and KPIs
In June 2023, analysts at KPMG looked at a number of insurers’ first interim reports and trading updates for the quarter ended 31 March 2023 to examine the impact of IFRS 17 disclosures; as well as the impacts of the new standard on key performance indicators (KPIs).
The report: ‘Insurers’ first reporting under IFRS 17 and IFRS 9’ details a series of in-depth analyses amongst insurers around the globe, with varying outcomes and observations, amongst them that, for the first time, the new rules will provide visibility on future profitability drivers of an insurer’s business; that new disclosures on discount rates provide new insight into insurance contract measurement and results; and that life and health insurers are incorporating the contractual service margin into their new business metrics, whilst non-life carriers are most likely to be using the same basis as under IFRS 4.
KPMG’s analysis showed that new disclosures under IFRS 17 provided previously unavailable insight into contract measurement and results, and that most insurers that issued interim reports under IAS 34 Interim Reporting disclosed reconciliations of insurance contract liabilities for the current and comparative period.
The findings also suggested that insurers are starting to incorporate IFRS 17 and IFRS 9 into their KPIs, but with varying levels of impact. In addition to new KPIs emerging, KPMG’s analysis suggested that insurers are now revising their performance targets.
Shareholders’ equity
A degree of divergence in impact was also found by analysts at ratings agency, AM Best, which stated in a Special Report in May that insurers’ disclosures pointed to a considerable variation in the effect of the new standard on shareholders’ equity – a finding that was far more pronounced for life insurers than it was for non-life. For those in life, it said, the range of outcomes was biased to the downside, whilst for non-life, the opposite was found to be the case. Composite carriers have thus been found to have experienced a balance of effects, leading to overall stable shareholders’ equity on transition. That said, a reduction in shareholders’ equity was “far from automatic” for life carriers, according to the agency.
Operational gains
RNA Analytics’ own analysis shows that many of the larger insurers invested heavily in ensuring teams have the skills and understanding to address the requirements of IFRS 17. Some smaller and medium-sized insurers, meanwhile, struggled with those increased demands while still managing their business-as-usual (BAU) activities. We have seen companies opting for the Premium Allocation Approach (PAA) approach to IFRS 17 rather than the General Measurement Model (GMM), which, whilst more complex, can arguably be better leveraged for other insights.
Whilst it is early days yet, outcomes depend very much on the thinking behind implementation. Generally, insurers have been implementing IFRS 17 because they had to, rather than looking at it as an opportunity for transformation.
Whilst there are geographical variations, in the short-term, our work with insurers has shown us that significant operational and technical gains have been made, through never-before-seen end-to-end functionality, greater accuracy and faster run times than previously achieved.
Our partnership with a large South American life insurer, for instance, has resulted in highly optimised processes that were formerly highly repetitive and time-consuming – and ultimately limiting for the business. Already, they have observed a saving in information generation and processing times and are now able to carry out scenario analysis and specialised tests that provide the company with a better horizon in more technical and financial areas.
Looking past the initial bedding-in period, the ‘big picture’ advantages of IFRS 17 will soon become clearer – both in terms of the transparency that was sought when initiating the new standard, as well as the additional benefits that will inevitably follow on from improved processes and visibility.
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