Perspectives

IFRS 17, Insurance Contracts

Understanding the impacts to your business and readying for change

​It was 20 years in the making, but the new International Financial Reporting Standards (IFRS) insurance contracts accounting standard, IFRS 17, was published in 2017. This is a massive change for the insurance industry and one that we believe requires insurers to plan well in advance for implementation, and the clock is ticking.

January 23, 2018

A blog post by Wallace Nuttycombe, principal, Deloitte & Touche LLP and Bryan Benjamin, senior manager, Deloitte & Touche LLP

For the implementation of IFRS 17 to reach its desired outcome, seeing it as more than just a compliance exercise is recommended. The new accounting standard is nothing short of a complete overhaul of the financial reporting for insurance contracts. Its implementation will likely take more than two years to complete and may affect every area of business—from accounting, actuarial models and pricing to IT and data collection, and even marketing and investor relations may be impacted.

IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts. Understanding the impact to all factions of an organization and developing a detailed blueprint for the implementation is crucial for a smooth transition to the new standard.

First, what does IFRS 17 entail? Here is a quick primer

The key objectives of IFRS 17:

  • Introduce a single IFRS accounting model for all types of insurance contracts
  • Make the new accounting model highly transparent
  • Align insurance accounting with the general IFRS accounting of other industries as much as possible

The main features of the IFRS 17 general measurement model include:

  • Estimates and assumptions on future cash flows are always current and should maximize the use of observable market consistent information
  • Cash flows are discounted using a market rate that is reflective of the risk, duration, and currency of the insurance contract
  • Current and explicit measurement of risk
  • Expected profit is deferred and aggregated in groups of insurance contracts at initial recognition while expected profit is recognized over the coverage period
  • On transition to IFRS 17, an entity applies the standard retrospectively to groups of insurance contracts, unless it is impracticable. In this case, the entity is permitted to choose between a modified retrospective approach and the fair value approach
Life vests

Understanding how IFRS 17 may impact your business

Implementing IFRS 17 will likely bring significant changes to an entity's process and systems, and may require much greater coordination between many functions of the business—notably between finance and actuarial. These changes can create a fundamental shift in the way data is collected, stored, and analyzed, and can significantly impact business operations, financial systems, and forecast methodologies as they adjust to the new standard. Adopting IFRS 17 will likely be complicated and preparedness is crucial, but is enough being done to prepare for such a significant change?

This effort will likely generate implementation costs for many insurers as large as those incurred in the European Union for the adoption of the Solvency II regulations. According to European Commission estimates, the one-off net cost of implementing Solvency II for the whole EU insurance industry has been assessed to be around EUR three billion to EUR four billion. Understanding the impact of IFRS 17 will have on an organization and awareness and preparation for the changes ahead is important for an undertaking of this magnitude.

According to European Commission estimates, the one-off net cost of implementing Solvency II for the whole EU insurance industry has been assessed to be around EUR three billion to EUR four billion.

Getting ready for IFRS 17 to help enable a smooth transition

For a global insurer, implementing changes in various accounting and regulatory regimes is often complicated and demanding. Here are some practices to consider when planning for and implementing accounting changes:

Company and leadership awareness

Building awareness is the first step. Given the scale and complexities of IFRS 17, it is a crucial step to take for an effective road to compliance. Before commencing any broad training program or developing an implementation roadmap, it is recommended leadership be fully briefed on the features and expected business impacts of IFRS 17.

Leadership involvement is vital for a large-scale project. Leaders should stay involved in the project from the start to completion. Not only is vigilance important to project transparency for everyone involved, but it also provides insights into any roadblocks that may require a course correction long before the project veers off course.

Training and preparation

Take enough time to prepare for the process. A comprehensive and detailed impact assessment and gap analysis is often the most critical project element to get right. Do not design massive changes to systems and processes before knowing what the company is aiming to achieve at the finish line. It may be necessary to change direction after gaining insights into the project and impact expectations.

Educate and train extensively. A solid knowledge base about the new standard is a must. However, interactive training and real-world models can accelerate planning and help facilitate a more efficient and effective conversion.

Planning for an effective implementation

Create a cross-functional plan. Implementing the necessary changes for IFRS 17 can be a gigantic undertaking. Understanding the new standard and proper training is not enough. Planning for the implementation is a crucial element for a smooth and effective transition.

Maintain a clear vision. Once a plan is in place, a clear vision towards the primary business objectives can help prevent the IFRS 17 implementation program from becoming so big that people lose sight of its purpose.

Think globally. Planning should take into account locality and global coordination. The experience will be different in Europe than it is an Asia, which is different from the needs of entities in the United States that will also continue to follow US generally accepted accounting principles (GAAP).

Focusing on awareness, preparedness, and planning are keys to implementing the new standard while reducing the complexities and demands of a standard of this magnitude.

In the coming weeks, we will also explore in depth areas impacted by IFRS 17—such as IT, data collection, and finance systems. We will also discuss operational models, new strategies, assessment tools, and insights into other standards impacting insurance company accounting, such as the FASB's project on targeted improvements for long duration contracts, the changes issued for derivatives, hedging, and current expected credit loss (CECL). In addition, we will cover accounting tools and techniques that can be leveraged to help adopt these new standards. Stay tuned.

Focusing on awareness, preparedness, and planning are keys to implementing the new standard while reducing the complexities and demands of a standard of this magnitude.

Visit the Controllership Insights blog for additional blog posts.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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