IFRS 17 Insurance accounting changes in 2023

Insurers are underestimating the magnitude of the biggest insurance accounting change in decades.

In brief

• Reporting against IFRS 17 requires insurers to transform their processes, controls, and technology and prepare data at a new level of granularity.
• New financial statements will look different from those produced using local accounting standards, calling for stakeholder education and communication.
• Manual processes and legacy systems should be replaced with modern accounting platforms that will centralise data and automate processes to make quarterly reporting sustainable.

After a long, slow lead up, insurers around the world are dealing with the fact that the global harmonising accounting standard, IFRS 17, started on 1 January 2023. In Australia and New Zealand, the IFRS 17 implementation journey has taken a lower priority until recently, due to several years of natural catastrophes, COVID-19 pandemic, and increasing regulatory demands. Now the moment has arrived—and not everyone is ready.

Like their global peers, most Oceania insurers have underestimated the effort required for IFRS 17 implementation. But unlike some other jurisdictions, where IFRS is “permitted but not required”, Australian and New Zealand insurers have no option but to comply. While the new accounting standard brings the advantage of global consistency and comparability, it also brings with it the type of wholesale disruption experienced in Europe with the introduction of the Solvency-II regulations.

IFRS 17 is extremely complex and significantly different from local insurance accounting approaches. Insurance contract liabilities will be measured in a different way to existing accounting standards. Premiums will no longer be presented on the face of the P&L. IFRS 17 also introduces the Contractual Service Margin (CSM), representing unearned profits expected to amortise into income as services are provided.

The new standard requires more granular data inputs and outputs, more complex modelling and reconciliations, more judgement to be applied, and more detailed analysis to support and explain results. In practical terms, it requires changes to accounting manuals, charts of accounts, financial statements, and financial impact analyses. This makes it challenging to implement a cost-effective and robust IFRS 17 solution.

IFRS 17 also comes with changes to teaming and talent management: actuaries and accountants will need to adjust to new and different ways of working. The new P&L will require input from actuarial as well as finance teams, who must ensure consistency between all sources and that any approximations or adjustments used in the balance sheet also work for the P&L. This has created an acute need for training and upskilling—and for previously separate teams to work closely together.

Does your business understand the new financial statements?

The business impacts of IFRS 17 need to be understood and communicated to a wide range of internal and external stakeholders. Insurers and their stakeholders need a solid understanding of what the financial information produced actually means, and how it changes the way profits are measured and business value is created.

At a practical level, IFRS 17 results in balance sheets and P&Ls that read differently from those produced under the previous standard. Profit will be recognised based on a combination of when the insurer provides insurance coverage to customers, and when and how it is released from insurance risk. This has the potential to significantly change the pattern of profit over the life of insurance contracts. Also, premium revenue will no longer appear on the face of the P&L, replaced by “insurance contract revenue” calculated based on movements in several different elements.

As a result, insurers need to educate senior management and boards about the meaning and importance of new terms, and global parents, local shareholders, and the market about the changes and their effects. Those insurers producing early iterations as parallel runs (i.e., running their IFRS 17 results in parallel with current IFRS 4 results) have observed that IFRS 17 requires a paradigm shift in terms of how to interpret the financial statements. Challenges include guiding directors in their understanding of the various liability components and explaining the drivers for changes between the opening and closing positions.

Can you integrate and visualise IFRS 17 data to tell a story?

EY teams have developed new tools to help EY clients understand the impact IFRS 17 will have on their consolidated financial statements as new metrics appear and the volume and complexity of data increases. For example, the EY Intelligent Metrics Navigator (IMN) tool is a data analytics solution that allows insurers to transform data in a systematic way so that it can be visualised (but not stored) in the cloud.

IMN integrates data from multiple systems in a single location, using virtual data models to dynamically bring results to life. Executives and directors can drill down into the business to understand what’s driving business value. Key messages can be easily highlighted and communicated, improving collaboration and breaking down knowledge barriers.

The tool also reduces costs by optimising existing processes, standardising reporting using pre-defined templates and avoiding finance teams having to manually prepare slide decks for management information.

Beyond its immediate education use case, IMN becomes an invaluable ongoing analytical and communication tool. Employing new data analytics and visualisation techniques will give leaders additional insights into business performance—as well as helping them to communicate IFRS impacts to internal risk management, product development and product pricing teams.

It will also continue to be a powerful means of communicating with external stakeholders. Once insurers go live, robust stakeholder communication will become much more important.

Can you prepare your new financial statements in an efficient, automated way?

Some boards have already seen the results of parallel and dry runs. These leaders are becoming increasingly concerned about the amount of time and people required to deliver financial statements under the new standards.

Insurers need to understand that, while the immediate focus is on preparing for the first set of financial statements, the experience does not end there. It is simply not sustainable to rely on large teams using manual processes to prepare the IFRS 17 financial statements.

While IFRS 17 poses many significant challenges for insurers, it also represents an opportunity to modernise and upgrade technology and data capabilities in their finance, risk, and actuarial operations. Some insurers are using their investment in IFRS 17 as a platform to improve the finance function by automating and reducing manual workarounds. Typical areas of focus include:

• Modernising actuarial models and their enabling technology, some of which are decades old
• Optimising the financial close and disclosure processes
• Integrating finance and actuarial activities, including integrating the data underlying the actuarial and finance processes
• Automating controls

The big technology challenge comes from correctly managing a complex and interconnected systems landscape and the increasing volumes of data. In fact, local participants in an EY IFRS 17 Webcast rated data-related issues as the biggest challenge, followed by standard interpretations and resourcing.

It takes a huge resource commitment to clean up the data flow and make sure it works from actuarial systems through sub ledger to general ledger. Many insurers are finding that the granularity needed for the CSM counts and disclosures is a significant challenge. Other pain points are aligning data models, managing the flow between all the different systems, implementing new accounting rules engines or subledgers, and deriving the right external and internal reporting.

1 January 2023 was the end of the beginning

It's becoming increasingly clear that not all insurers have in place the systems and processes required by the deadline. Even those that do will face a long period of consolidating their processes and controls before IFRS 17 reporting becomes seamless and insurers have optimal controls and KPIs in place.

Teams working on IFRS 17 statements need to be realistic. The process for production of the first, second, and third sets of results will not be perfect—and it will take a while for the business and its stakeholders to understand the new financials and their implications for the business.

2023 is just the start of the IFRS 17 journey.

For further information, see this IFRS 17 podcast series.