Counting down to IFRS 17

The idea of a global standard for calculating the value of insurance contracts has been in the air since the early 2000s. After much consultation and delay, the International Financial Reporting Standard 17 (IFRS 17) comes into effect on 1 January 2023. While 18 months may seem a long time, industry experts agree insurers should already be preparing the way for implementation of the standard.

The scale of the transformation was revealed in early June in a survey of over 300 insurersaround the world by global intermediary Willis Towers Watson. It estimated total global costs at between $15bn and $20bn.

For major multinationals, the bill for implementation will typically be between $175mn and $200mn, while smaller insurers face an average cost of around $20mn.

IFRS 17’s long-term significance may be even greater, however, since it will dramatically alter the reported profits of thousands of insurance groups including the world’s largest listed institutions.

The global insurance industry currently operates under IFRS 4, which was implemented in 2004, but which fell short of being a rigid standard. While setting some minimum standards on disclosures, it allowed diverse practices to continue, making financial comparison between insurers on an international scale – or even within markets – extremely difficult.

Hopes for a more definitive standard to replace IFRS 4 have taken years to agree. Statements of principle were issued in 2001, a discussion paper followed in 2007, drafts came in 2010, and then something close to a final design was published in 2017. Implementation was originally planned for 2021.

Further delays followed. “There was quite unanimous feedback that 2021 was too ambitious, with a lot of countries around the world saying there was no way they could be ready for 2021,” explains Kamran Foroughi, Global IFRS 17 Advisory Leader at Willis Towers Watson.

So IFRS 17 was delayed until January 2022. Then came Covid-19, leading to a further 12-month postponement.

The final version is complex and detailed, but its core effect is to alter the way insurance contracts are accounted for in company balance sheets and profit and loss accounts.

“The aim is to deliver more transparent figures for insurance companies to investors so they can understand where the money is coming from,” says Francesco Nagari, Global IFRS 17 Leader at global consulting firm Deloitte.

“It requires that when you sell an insurance contract you must calculate on day one the net present value of all the future cash flows. So even before you get any cash you’ve got to calculate the value of all future premiums and all future claims that you think will come from that contract.”

Crucially, it will stop the practice of booking a profit on an insurance contract on day one and will require discount rates to be applied – in effect calculating the effect of interest rates on liabilities.

Short-term contracts of less than a year can avoid much of this new standard and Nagari says this is good news for general insurers, many of whose contracts are for less than 12 months. But, he adds, this is no grounds for complacency.

“General insurers really have to be careful. They may have only a minority of contracts where they protect for longer than 12 months – things like energy contracts, engineering contracts. A lot of contracts in the commercial sector are longer term,” he says.

Implementing IFRS 17 involves technology, data, and work processes, and requires significant staffing power. Willis Towers Watson’s survey indicates that the equivalent of an extra 10,000 full-time employees will be needed across the industry. The necessary data must be collected, with some of it not having previously been integrated into financial reporting, and new IT systems may be needed to calculate the new valuations.

So far, few if any major insurers have declared themselves ready, but behind the scenes the major multinationals are hard at work. Not least because, in practice, the deadline may be much earlier than January 2023. IFRS 17 requires insurers provide comparable figures. While 2023 will be the first year to which IFRS 17 directly applies, financial results for 2022 will also have to be restated using the new standard to provide comparison.

Nagari says that most major insurers have recognised that challenge.

“Deloitte works with several insurance companies around the world, and I can say that all of our clients want to complete the transition of their systems by early next year at the latest,” he says. “They want to make sure management has the opportunity to see the new numbers. They want six to nine months of next year when they can run everything in parallel, before they go public in 2023.”

Nagari suggests that the picture among smaller operators is “patchy” and those that have delayed taking action may pay a price. “Everyone is scrambling to get the job done. If you started early enough you may be confident. Others may be realising they have left it too late.”

While he believes there is capacity available for firms to get that job done in time, those that have left it to the last minute may find the costs are higher than they needed to be.

The first opportunity to see IFRS 17 in action will be the interim reporting season in 2023. IFRS 17 has already been the subject of countless investor questions at insurance company shareholder meetings as they try to assess the impact of the new rules. The summer of 2023 is likely to see the questioning reach fever pitch.

Ed Anderson, Insurance Partner at UK law firm Browne Jacobson, says education is a vital piece of the puzzle.

“Insurance executives need to have a very clear strategy and plan about how to explain the differences in a language that investors can easily understand, because there are going to be significant changes to results and to key performance indicators,” Anderson says.

While there is widespread agreement that IFRS 17 is going to transform the insurance industry’s financial numbers, there is little consensus on whether it will appear to flatter results or expose weaknesses. This will very much depend on which market and geographies and insurers currently operate in and the existing accounting rules they adhere to.

Willis Towers Watson’ Kamran, Deloitte’s Nagari and Browne Jacobson’s Anderson at all agree that IFRS 17 is, in the roun,d a positive development that will provide much-needed transparency and comparability between insurers.

Insurers themselves are more divided. Willis Towers Watson’s survey found that only half (52%) of respondents believe that IFRS 17 measurement of earnings and equity will be slightly or much more helpful than current figures.

Lurking within the implementation challenge there may also be an opportunity to use IFRS 17 as a catalyst for a wider overhaul of systems and processes.

Nagari explains: “Everyone says ‘We have to modernise finance’ or ‘We have to modernise actuarial’. But they never have the opportunity to put in the investment. IFRS 17 has created an inescapable opportunity for executives to say: ‘If we’ve got to do this, we'll do it smartly. We will do compliance plus.’”

In the long run, those insurers that use the latest development of IFRS as a catalyst to upgrade systems and processes may find the benefits of such an overhaul make up for the initial cost and implementation headaches. Such a prospect may be just what they need get them through the next 18 months.