IFRS 17 – A game changer for insurance companies

Point of View –
JAMES RAVI –

The Insurance industry plays a quintessential role in the global economy. On the one hand they act as shock-absorbers to bear the brunt of risks, from natural disasters to personal tragedies. On the other hand, they play a feeder role as long-term institutional investors to fund the economic growth with their deep pockets. With over $13 trillion in assets, insurers account globally for over 10 per cent of the total assets of listed entities.

JAMES RAVI

The nature of their business exposes insurers and their investors to multiple risks. The financial health of insurers affects the global economy because of policy-holders’ and investors’ exposure to insurers and insurers’ role as institutional investors. This makes it all the more important for the insurers to report insurance risks and the changes in those risks in a timely and transparent manner in their financial statements.
Current reporting practices
Strangely enough, the current Standard, IFRS 4, which was issued back in 2004, does not address how to measure insurance contracts issued by the insurance companies. Being a provisional or temporary standard, IFRS 4 intentionally laid no guidance for the accounting and reporting of insurance risk, investment risk and their impact in the financial performance. As a result, insurers currently use a wide range of accounting techniques and practices for reporting the key aspects of their business. Differences in accounting treatments within and across jurisdictions make it difficult for users to understand and compare insurers’ financial statements.
Arrival of IFRS 17
In May 2017, the IASB (International Accounting Standards Board) issued IFRS 17 Insurance Contracts, a comprehensive new accounting standard for accounting and reporting different insurance products, which will replace the current Standard IFRS 4 with effect from January 1, 2022. Via its standardisation, IFRS 17 changes fundamentally the way in which insurance contracts are accounted for over time. The new standard offers greater comparability and transparency about the profitability of new and existing business and gives users of financial statements more insight into the company’s financial health. Separate presentation of insurance and investment activities and their impact on the financial results will provide added transparency about the sources of profits and the quality and sustainability of earnings.
Challenges in implementation
IFRS 17 introduces a fundamental change to existing insurance accounting practices. Many concepts in IFRS 17 are new to the industry given that IFRS 4 focused only on enhanced disclosures and does not prescribe the measurement of insurance contracts.
Moreover, implementing IFRS 17 is a complex and challenging exercise, requiring considerable effort to gain an initial understanding of the impact on the reported numbers as well as identifying upgrades to systems and processes to ensure they can provide compliant data.
Some of the concepts in the new Standard are challenging even to the experts in the industry who struggle to demystify them.
Around the world, the insurance industry is fraught with the daunting task of implementation of IFRS 17. In Oman, the local insurance industry regulator, CMA (Capital Market Authority), has mandated a well-planned, three phase implementation programme requiring insurance companies to be geared up for the implementation well ahead of the deadline.
The regulator had instructed the related companies to start implementation of IFRS17 from 2019 onwards in three phases. The First phase was supposed to be complied with by September 2019, the second phase by June 30, 2020 and third phase by December 2021.
Most of the local insurance companies have completed the Gap Analysis in Phase-1 and are now in the midst of preparing for the long-drawn Phases 2 and 3 of implementation.
Actuaries play a pivotal role in measuring the insurance risks and in quantifying the liabilities with their professional expertise. Though the actuaries continue to play a significant part in number-crunching under IFRS 17, the role of accountants has drastically changed as they need to understand the new concepts and principles under the new standard.
This demands incisive knowledge of the insurance products and the skillset to recognise their impact in the financial statements. Accountants are required to apply significant estimates and judgements in presenting the financial statements under the new standard.
Insurance companies understand the need to acquire the necessary skills and expertise to rightly implement the new standard within the timeframe stipulated by the regulator. (The author is Director – Audit & Assurance of Crowe Oman)

Oman Observer

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