IFRS 17 implications for European insurers

Learn more about the Insurance Accounting Standard, IFRS 17 Insurance Contracts issued by the IASB last year.

The International Accounting Standard Board (IASB or Board) issued the new Insurance Accounting Standard, IFRS 17 Insurance Contracts (the Standard) on 18 May 2017. The Standard will have to be applied for reporting periods starting on or after 1 January 2021.

This standard will represent the most significant change to European insurance accounting requirements in 20 years, requiring insurers to entirely overhaul their financial statements. Given the scale of this change, investors and other stakeholders will want to understand the likely impact as early as possible.

The Standard uses three measurement approaches:

1. General model or Building Block Approach (BBA) — for most long-term contracts
2. Premium Allocation Approach (PAA) — for most short-term contracts (optional)
3. Variable Fee Approach (VFA) — for contracts with direct participation features

The principles underlying these measurement approaches result in a fundamental change to current practice, particularly for long-duration contracts. The requirements are markedly different to existing accounting in a number of critical aspects that will:

•  Change profit emergence patterns
•  Increase the frequency of loss recognition
•  Add complexity to valuation processes, data requirements and assumption setting.

The requirements for forecasting results of the new metric is even more challenging than analyzing current results.

The IASB decided on a mandatory effective date of 1 January 2021 for the new standard. In the coming years, insurers will need to interpret and apply the requirements to their insurance contracts — a process involving significant time and effort. The major change program required will extend beyond finance and actuarial teams and its impacts will need to be communicated to a broad range of internal and external stakeholders. In addition to the Standard, insurers will need to adapt to a wave of other accounting changes over the next five years, including:

• IFRS 9 Financial Instruments — effective 1 Jan 2018 (although most insurers will be able to defer this to 1 January 2021)
• IFRS 15 Revenue from Contracts with Customers — effective 1 January 2018
• IFRS 16 Leases — effective 1 January 2019

Six actions to kick-start your implementation program:

1. Educate the executives on the new requirements and implications
2. Identify the key methodology and design decisions and assumptions driving implementation
3. Analyze the financial, operational and system implications
4. Draft budget and plan resourcing requirements
5. Assess implications for other current or planned programs of activity in the next three to four years
6. Assess strategic and product implications

Proactive responses to IFRS 17

CFO

• Communicate early to key stakeholders, including market analysts and shareholders, providing clarity around the expected impacts to the financial statements and profit profiles
• Analyze current management reporting, key performance indicators and incentive frameworks for ongoing applicability, and incorporate necessary changes for analyzing margins and volatility
• Update volatility and asset-liability management frameworks for measurement changes under IFRS 17 and assets under IFRS 9
• Evaluate any tax, capital or distributable profit implications

Controllership

• Update the chart of accounts and account mappings to cover new disclosures
• Prepare pro forma balance sheet, profit and loss (P&L) and note disclosure formats to meet new requirements
• Update accounting policies and practice manuals
• Analyze closing and reporting processes, including target operating model of finance function and updated responsibilities and timelines
• Engage with taxation authorities to discuss implications and transition approaches if taxable income calculations are based on current IFRS treatments
• Design specific controls to drive new process quality, robustness and integration into existing control frameworks enhancing efficiency to drive cost-effectiveness
• Update process and controls documentation and operating procedures
• Create new, or revise, existing internal (e.g., forecasts and other management reports) and external (e.g., investor and analyst packs) reporting templates
• Design and complete the significant note disclosures for each reporting period
• Focus on the auditability of reported figures — this will require a high level of interaction and consultation with the external auditor during the implementation process

Taxation

• Determine the impacts of IFRS 17 on current tax and deferred tax
• Engage with local tax authorities to discuss treatment if tax follows IFRS financials
• Consider other impacts such as data requests for tax compliance, tax impacts of new KPIs and changes to reward plans

Actuarial function

• Allocate time and resources to projects to design, build and test new data, modelling and systems capability
• Update methodology guidance for risk adjustment, discount curve and assumption setting
• Create a new calculation engine for amortizing and adjusting the contractual service margin (CSM)
• Work with the finance team to estimate impacts on transition and design optimal approaches
• Assist in making sure the reported figures are auditable
• Analyze earnings volatility and ways to mitigate
• Perform in-depth analysis on impacts on ALM strategies

Business finance and operations

• Assess current data availability against new data requirements for both model inputs and outputs
• Change the content and structure of data captured from business units to support group reporting
• Change the process for reporting that data to the group reporting team
• Enhance the scrutiny of data quality, storage and archiving (given the retrospective transition requirements, this should happen ahead of the date of implementation)
• Enhance data reconciliation based on new data needs
• Enhance the scrutiny of data governance and management
• Design new target operating model for finance
• Select, design and implement new IT systems to facilitate efficient reporting

Investing

• Review investment policies and asset liability management strategy based on the impacts of the new measurement models for both insurance contracts and financial instruments

A proven program

In the next four years, insurers will face significant technical and practical changes. EY is already working with major insurers to assess the impacts of these changes on their business, mobilize their implementation programs and educate their stakeholders. In our experience, proactively maintaining market confidence in an insurer’s ability to execute these programs is essential.

With the standard finalized and as the effective date approaches, external stakeholder interest will increase. Insurers must be prepared to educate stakeholders on the expected impacts and communicate their execution plans. This will require a well-planned program and a clear organizational view of the effects of the new standard.

EY has the experience to help insurers assess these effects and design, and implement a cohesive program.